Robin Feldman on Drugs, Money, and Secret Handshakes
Apr 8 2019

Drugs-Money-Handshakes-196x300.jpg Law professor and author Robin Feldman of UC Hastings College of the Law talks about her book Drugs, Money, and Secret Handshakes with EconTalk host Russ Roberts. Feldman argues that the legal and regulatory environment for drug companies encourages those companies to seek drugs that extend their monopoly through the patent system often with insufficient benefit for consumers. The prices for those drugs are then protected from new competition. She also argues that the pharmacy benefit management system allows drug companies to exploit consumers. The conversation concludes with a discussion of what can be done to improve the situation.

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Explore audio highlights, further reading that will help you delve deeper into this week’s episode, and vigorous conversations in the form of our comments section below.


Joe D
Apr 8 2019 at 11:13am

So, this sounds like anti-competitive behavior. Why isn’t some government organization going after the drug companies like they went after Microsoft and AT&T back in the day.

David J Driver
Apr 8 2019 at 1:41pm

I do want to mention that there are regional PBM’s that have transparent pricing. I won’t turn this into an ad but I work for one.

Brandon Alleman
Apr 8 2019 at 9:48pm

Is there a way for people working in this space to find smaller, less entangled PBMs?

David Ermer
Apr 8 2019 at 8:20pm

Good program as usual. It’s worth noting that the federal government initiated prescription drug rebate programs in Medicaid, the Defense Department, and the Veterans Administration before commercial prescription benefit managers joined the club. Also the Medicaid law prohibits prescription benefit managers (but not Medicare Part D plans) from negotiating prices below the Medicaid price. Finally, I heard recently at the conference that the speciality drug Humira is protected by 100 patents. Professor Feldman made a very strong point about the need to fix our patent laws.

Brandon Alleman
Apr 8 2019 at 9:46pm

I am a Family Physician and I have enjoyed the recent discussions on healthcare. This was an amazing description of the mess that is all too common in this space. However, what I have found lacking in these recent healthcare episodes is a knowledge of what innovation is happening “on the ground”. I own a non-insurance accepting practice. We charge a low monthly membership (<$40 per patient per month on average) and we dispense medications to our patients. All of our common blood pressure medications are ~$0.60 per month (lisinopril, amlodipine, etc). Metformin (most common diabetes drug) is  $0.02 per pill. This is including a small mark-up to pay for the pill-bottle and label we use. We try to break even on drugs and have it as a benefit for being a member of our clinic. The discussion of insulin in this episode failed to indicate there is cheap insulin on the market: and The problem is we are not taught how to use these in medical school and residency. These are not the fancy new “basal-bolus” drugs that we are taught to use and told are “better”,  so everyone sticks with what they were taught despite the cost. The new drugs were supposed to be “safer” but recent evidence shows this isn’t even true ( We also do at cost lab pricing so an A1c, CBC, CMP, and Lipid Panel together cost ~$13. So a diabetic with high blood pressure in my clinic pays $0 for the visit beyond his membership, <$3 per month for medication, and <$13 whenever labs are needed. There is innovation happening, you just have to look in the right places.

Michael McEvoy
Apr 12 2019 at 9:23am

Insulin ….sorta cheap …. it’s still about 2.6 cents per unit with Novolin N in my area ( US mid Atlantic coast) That cost does not include delivery systems.

But insulin has been manufactured for us by bacteria since the mid 80s so it seems it should be even cheaper. In addition, why is there no manufacturer who wants to go to the trouble to put it in a pen ? The insulin pen seems much more user friendly and I presume the cost on such a system is trivial .

I applaud your practice for its cost reducing ways .

Doug Iliff
Apr 8 2019 at 10:54pm

This is another exasperating, frustrating, infuriating episode about the crime of pharmaceutical pricing, except that it didn’t add much more than the above to Dr. Feldman’s previous interview.  We need to change patent law.  OK, got it.

I was hoping for at least a nod to what (the remnant of)  the free market in medicine has to offer.  Didn’t hear it, so here goes.

Download the GoodRx app.  It’s been around for several years, and is the closest thing to transparency you’ll get in health care.  Robin said that Treximet, which is a combination of two generic drugs in the treatment of migraine, sells for $800 for 9 pills.  Not in my practice.

My patients are directed to GoodRx, which tells them that 9 Treximent can be purchased for $225 at CVS in Topeka, Kansas.  But wait!  It gets better.  Treximent contains 85 mg of sumitriptan and 500 mg of naproxen, also known as Aleve.  The latter costs pennies.  Sams sells 9 100 mg sumatriptan for $10.

I don’t know how GoodRx works, any more than I comprehend PBMs.  It’s a mystery, but it’s a good mystery.  Let me give you another example, a typical patient in my overweight, underexercised population.

Henry C takes 2 metformen 750XR ($10 for 90 days at Walmart); atorvastatin 20 mg every other day ($6.00 at Dillons); pioglitazone 15 mg (19.98 at HyVee); losartan/hydrochlorothiazide 100/25 ($16.38 at HyVee); atenolol 50 mg ($10.00 at Walmart); and clopidogrel 75 mg ($6.00 at Dillons).

There you go.  Less than $69 for three months of effective generic treatment for diabetes, hyperlipidemia, hypertension, and arteriosclerosis cardiovascular disease.  Upset at that?  Well, Mr. C could also abstain from doughnuts, beer, pizza, and waffles, and walk 30 minutes five days a week— and in time, he would treat himself for free!

Why isn’t this the Big Story?  Maybe it’s doctors who have eaten too many pharmaceutical lunches.  I don’t know.  But I do know this:

If every patient in America had a $10,000 deductible health insurance plan combined with a health savings account, as I do, they would learn to shop for drugs just like they shop for washing machines.

It’s remarkable to me that patients will willingly pay $35 in a drug co-pay for a pill that would cost them $6.00 in cash.  We’ve made morons out of Americans, and that’s the real problem.

Eric Johnson
Apr 10 2019 at 12:33pm

According to this link, the plurality of employer plans have a deductible between $1000 and $3000.

I would think that would provide incentive enough to consumers to pay attention to price when spending their health care dollars.

Michael McEvoy
Apr 12 2019 at 6:36am

Doug and Brandon –

I have no idea if either of you are married, but my wife looks at me in a curious way when I start a conversation with “ I was listening to these two economists talk…”

We should start the “Docs who listen to Econ Talk” group. Not exactly sure how to do this , but it could be fun .

Somewhere on Facebook?

I live an hour north of DC . How about you guys ?


Mike McEvoy, MD

Justin Sandall
Apr 18 2019 at 12:48pm



I’d join. I’m an anesthesiologist and intensivist. I love EconTalk and preach market based approaches (direct primary care as Brandon wrote about, HDHPs/HSAs etc to everyone that will listen).

I’m hospital based and we are hit with shortages frequently….always meds in high demand that ought to be cheap to make (and thus purchase).

Russ’ proposal to start a non-profit manufacturer really resounded with me to help address the shortages my hospital, and many others, face.

I have no idea how to start.

Michael McEvoy
Apr 12 2019 at 9:25am

BTW , pretty sure Good Rx works via advertising. Most things “free” do just that.

That said , I also use it every day .

Eric Johnson
Apr 8 2019 at 11:07pm

This episode raised more questions than it answered.


I’d like to hear Russ interview someone who works for a PBM.

Ben A
Apr 9 2019 at 11:18am

I second this suggestion!

That said, Felton is 100% correct that Pharma uses all means at their disposal to block/delay generic entry. It’s less and less true that small molecule manufacturers are able to block entry with IP. But legal/regulatory proposals to prevent ‘evergreening’ of drugs and extended barriers to generic entry are a *great* idea. Felton’s one-and-done is one worthy approach. Reduction of the regulatory barriers to biosimilars would probably be even higher impact, and could be combined with it.

Felton’s claims about PBM impact are harder to evaluate. Can it really be that a massive purchaser like Kaiser can’t look to long term value and extract pricing transparency? This seems implausible, but I suppose it could be true. As Eric Johnson says above it would be great to get someone from a PBM (or on the purchasing committee for a large payer) to provide that perspective


Dr Golabki
Apr 16 2019 at 10:21am

Branded drugs are a pretty small piece overall health care spending and drug prices aren’t growing a lot faster than overall health care spending. So why are we looking for explanations of rising health care spending in archaic details of the drug pricing system? I worry that because drug prices are a hot topic politically, they are dominating the healthcare discussion, even in academia, which is actually making it harder for people to understand the underlying problems with our health care system.


Additionally, I don’t think Robin’s explanation of PBMs fully makes sense. It sounds like, according to her account, a PBM could massively reduce costs for payors by simply putting generics on formulary. If one of the big 3 PBMs (or a new PBM) did that… one would think all the payors would rapidly shift to this new competitor, forcing the other PBMs to follow suit to lose market share, thereby reducing drug costs industry wide. Russ asked Robin to explain this multiple times, but I was left pretty baffled.


A few possible explanations:

It is straight up collision.
This PBM / pharma partnership is actually not a big deal.
Recent regulatory changes  have created a short-term window where PBMs can capture value, but we’ve just got to wait for business innovation to catch up.


Philip Summa
Apr 9 2019 at 11:01am

This week’s episode was frustratingly ambiguous, to some extent astonishingly ignorant in its comments, and reflected some urban legends, about the US patent system.

As for disclosure, I am an intellectual property lawyer, registered to practice before the USPTO for over 30 years (and holding) and I am unaware of any circumstance in which a patent can be “tweaked,” or changed in a “trivial” manner to obtain another 20 year term and I am likewise unaware of any such thing as a “secondary” patent.

Furthermore, Russ’s use of the term “stupid patent system” was dismaying, pejorative, and apparently made from a perspective far removed from the actual US patent system

The author made some comments about a “new coating,” on a medication as if that somehow disqualified an invention. Perhaps a little chemistry is in order to remind Ms. Feldman that the stomach is an acidic environment, not all pharmaceuticals can withstand it (ever get a shot? or an IV?) and some need to be released gradually in pill form, a tremendous convenience for many users. I am winging it here, but no more than the author.

Perhaps the most ignorant statements (a harsh term, but one that I can use fairly) made by the author are her suggestions that Congress ought to include obviousness in the patent statue as a disqualification for patentability, and that patents should be term limited.

The requirement that an invention be non-obvious has been explicit in US patent statutory law since 1952, and implicit in case law for decades prior to that.

Term limits for patents started with the US Constitution, so we’re going back to at least 1792 on that one.

That the author would suggest a qualification for patentability that already explicitly exists as well as term limits that have existed since the proverbial “day one” demonstrates the hand wave with which she apparently examined the patent system.

Obtaining a patent based on an inventor’s work by prosecuting an application through the Patent Office, withstanding the several possible levels of challenge that an opponent can bring, and successfully enforcing an issued patent through trial and appeal is a daunting task. If Ms. Feldman has patents that trouble her because she doubts their validity, she should head to her nearest patent attorney (there are plenty of us these days) and get—forgive the pun—a second opinion.

Doug Iliff
Apr 10 2019 at 10:34am

Phillip certainly seems to know what he is talking about, and speaks from experience.  Russ, it would sure be useful to have Robin respond.  Any chance of that?

Apr 10 2019 at 11:38am

I second that suggestion, and second a previous suggestion to broaden the discussion by interviewing a qualified representative of the PBM.

Apr 10 2019 at 1:43pm

Also want to respond on this same point as I feel there was a pretty major misstatement of law here which dismays me from a professor involved in technology and patent law.  I’ve been a registered patent lawyer since 2000 and practice full time in the area and deal with these kinds of issues on a near daily basis.  Keep in mind that the following is not legal advice and should not be taken as such, it is simply a discussion of what is written in the law.

Executive Summary:

You CANNOT extend a patent beyond its original term for a “trivial” or (to use the actual legal language) “obvious” modification because even if a patent can be granted on the modification (which it cannot always be but sometimes can be), the term of the later patent will be restricted to the same term as the original by a process called “double patenting”.


Keep in mind that the term “obvious” has very particular meanings in patent law (e.g. there are whole books on what it means because it is so important).  Thus, what one person thinks is obvious the patent law may not.  I’m using something which is “obvious” under the legal meaning of the word.

There are actually two issues with regards to an “obvious” modification based on if what you are contending is obvious over something else you invented, or obvious over something invented by “someone else” (more generally something that is “prior art” for those of you who want to be more specific but the above is the general situation of interest).

The first issue is if you come up with an original idea (to you) which is “obvious” in light of “prior art”.  Generally the prior art is a patent or other publication, product, public use that is not yours (or is yours but still qualifies as prior art).  A patent cannot be granted on this “obvious” modification under 35 USC 103 which specifically provides that obvious modifications to known things cannot be patented.

However, this is not really the scenario I think being discussed on the show.  The show was more to the situation where you are trying to get a patent on something which is an obvious modification to something that YOU already got a patent on.

You CAN get a patent on such a modification (only if you filed it in a certain way that excludes the original patent from being used against you according to 35 USC 103 above as that would prohibit the later patent totally).  However, patent law already restricts the term of any such later granted patent to the term of the original in effectively two ways.

For one, the later application generally has to have what is called a “priority claim” to the first patent (that is generally necessary to meet that “certain way” above).  Cases with priority claims all have the same term (if filed in mid-1995 or later) as the term in such cases is 20 years from the earliest filing date of any of them.  35 USC 154

On top of this, there is a doctrine called “judicially created obviousness-type double patenting” (commonly just called “double patenting”) which is discussed in the patent office rules in depth (MPEP 804) and is based on the core requirement of patent law 35 USC 101 (although it was originally created by the courts) specifically “to prevent the unjustified extension of patent exclusivity beyond the term of a patent”.  Basically, if you try to patent multiple different things that are obvious over each other, you are entitled to do this (it is actually very important to be able to do this because of how courts interpret patents for infringement) BUT, you have to tie the  resultant patents together via ownership (must be owned by the same party) and term (filing what is called a “terminal disclaimer”).

This doctrine originally existed because the term of cases filed prior to 1995 wasn’t based on the filing date.  However, it is still enforced and should be used by the patent office to prohibit term extension for an obvious modification (and it is used, a lot).

Keep in mind that what is obvious is still the realm of the courts and patent office and exactly what the terms are is subject to certain provisions of term extension.  However, the statement that extension to term can be granted by patenting an “obvious” modification is simply not true.



Ben A
Apr 11 2019 at 7:40am

Just a little bit to add here from the biotech perspective (my background).

Mr. Summa is correct that you cannot get a secondary composition of matter patent on the same molecule. For an example, Felton’s discussion of insulin in many places rolls together different molecules — Lantus is literally not the same molecule as normal insulin, as several structural changes were introduced to change solubility and thus enable a long-acting profile. A patent on Lantus was judged novel and non-obvious over normal short-acting insulin. Perhaps this is what Felton regards as a ‘minor tweak’ — but I think that is debatable (if not tendencious)
The most standard way of extending exclusivity for a small molecule drug franchise (note the term “franchise”) is by developing a follow-on product based on the same underlying chemical entity. This does not protect the original chemical from competition, but creates second product to which share of the original product can be shifted during the exclusivity period. Thus, I get product X approved, and then 3 years before generic entry, get product X’ approved, shift market share to X’, and thus minimize the impact of multi-source entrants. This is a common enough approach to have acronyms in the pharma business (LCM — for life-cycle management)
It is possible to get a patent to drug X’ — this could be a new formulation, or even an enantiomer of the original racemic mixture (sorry for the technical language — basically this means that some drugs are a mixture of ‘left-handed’ and ‘right-handed’ structures, and one can find ways to patent a pure ‘left-handed only’ formulation.  Nexium as a follow-on to Prilosec and Memantine XR as a follow-on to memantine are examples. (
In biologics (large molecule) development, there are a number of ways to block generic entry through patents on manufacturing, dosing, and formulation. Again, these are not secondary composition of matter patents on the main molecule. You can look at Abbvie’s tactics to delay generic entry on Humira as an example. ( Many of these patents were initially granted, then struck down by later review. In my personal view, it would be useful to have a mechanism to avoid these types of disputes, via a mechanism like Felton’s one-and-done or a regulatory approach.

Sorry for the long comment! But it seemed like people are interested…

Michael McEvoy
Apr 16 2019 at 7:22am

Ben – I DO understand the chemistry terminology , and I want to let you know from the ground level that much of this chemical ingenuity is of little practical import . Sure , the Seldane to Allegra story WAS remarkable. ( Wish I had invested in Sepracor, I knew as soon as I gleaned their story it was brilliant ) But all the innovations on PPIs is something close to supercilious. Another words , from the point of view of the end user , there is no innovation or added value or benefit to many of these modifications . I am both aware of and fascinated by the biological propensity to favor L chirality ( or is it D , I can never quite remember) . Yet , in practical terms , despite reams of data that drug X offers superior absorption rates, receptor binding,  etc, most of these properties have not made a difference in clinical use .

I spend INORDINATE amounts of time getting hassled about prescribing the “SR ” vs the “ER ” vs the “XR” forms . I just want the patient to have a safe and reasonably effective BP med and I do not want to agonize over these small differences.

Dr Golabki
Apr 16 2019 at 10:48am

There’s two issues that Robin sorta combined here – Obviousness, and Value. Robin’s claim seems to be that many of the patents in this space are obvious and not very valuable to the patient.


The obviousness question is technical and complicated, but I generally agree with Robin that we’d be better off if we raised the bar a bit on what can be patented, or changed the system to more of a sliding scale (if something new, but a “minor tweak” then maybe it get’s less protection).


That said, most of Robin’s argument seems to rest on the value of the patent. Company’s are extending exclusivity (and monopoly pricing) without adding much value to patients. If you’re in England this isn’t can issue because NICE will evaluate your drug and simply not pay for it if it’s on valuable. So really it’s something in the US pricing system that’s the problem, and changing the patent system is sort of a backwards way of addressing it.


And while some of these more obvious innovations aren’t valuable, many are. Going from 3 pills 3 times a day to 1 pill once a day isn’t just more convenient for the patient, but it often leads to better compliance (people taking the drug as prescribed) which often has a bigger impact on outcomes than the sexiest novel drug in R&D. In other words… insulin therapy was developed in the 30’s but the safety and effectiveness of insulin therapy has improved radically.

Earl Rodd
Apr 9 2019 at 1:55pm

When I drive by enormous insurance company campuses, I always thing that the huge number of people in there are paid by “health care” dollars, yet they don’t manufacture drugs or medical devices (not even a bandage), do research to create new drugs or treatments, or examine, diagnose, or treat any patients.

Hearing this podcast and the role of PBMs, my first thought was: “Yikes, another feeder at the healthcare dollar trough who does none of things listed above!”

Jeff Brown
Apr 9 2019 at 2:52pm

This is exactly what would happen if alcohol was not regulated.

It is a little Budweiser approaching a bar owner, saying, “Okay, at the end of the year I’ll pay you 50 cents a bottle if you’ve sold 40,000 of Bud. Better yet, I’ll make it $1 a bottle if you don’t put any of that microbrewery’s beer on the menu.” If the microbrewery sells a limited number of bottles, how could it ever compete? The microbrewery could never offer enough off the price off its few beers to compensate for the tens of thousands of dollars the bar owner would forgo by rejecting Budweiser’s offer.

Love the podcast.

Apr 9 2019 at 4:58pm

A very interesting discussion and I appreciate the depth of the discussion.

One point of the discussion that I didn’t quite understand, and that involves patents of existing drugs that have slight changes (e.g. new coating that improves absorption).  If Drug Company A does this, what prevents Drug Company B from creating a generic of the original drug (same formulation with the old coating) and selling that?  If B doesn’t have a drug of its own in that particular area, then they’re not cannibalizing on any of their own drugs and would be better off.  And if B is one of the drug companies large enough to have cozy relationships with the PBMs, then they’d be able to get it to market.

Is the issue that when A re-patents an existing drug with the slight change, that legally prevents B from making the existing drug without the slight change?  Or are their backroom agreements between A and B not to create generics in this manner to protect each other’s monopoly profits?  Or is something else going on?

Apr 11 2019 at 11:54am

I had the same question.

Also, if Drug Company A is getting new patents from minor tweaks to their old drug, what stops Drug Company B from doing the same thing and patenting a version of Company A’s old drug, perhaps before Company A can?

Duncan E
Apr 9 2019 at 6:43pm

I don’t think you can just extend a patent. You can only get a new one. So this doesn’t explain why genetics of the old patant don’t appear.

For example Insulin. This was discussed, but I don’t think they got to the bottom of it. Why isn’t there a generic insulin based on the old patents? Brandon Allemans comment above seems to indicate there is one but doctors don’t use it. That sounds like it a different issue than the patent system.

Michael Bodensteiner
Apr 9 2019 at 8:42pm

I wanted to note that I get a generic at Costco, 14% margin I assume, that’s about 80% less than a generic through my insurance/benefit provider.  The name brand is more if I get permission to use it. The provider rep was dumbfounded when I told him the price I pay.

The hundreds of dollars in savings come only at the risk that I can’t get reimbursed if my deductible is met.  I don’t know is they carry any insulin products.  Perhaps this is a possible channel for consumers to get generics being excluded from most plans. The greater the price variance the less risk consumers face if they can get products outside their plan.

Hans D Dramm
Apr 11 2019 at 11:39am

I just had a meeting with our business insurance advisor and the subject of PBMs came up as an aside.  He mentioned that Costco has a PBM business unit and they (the insurance agency) works with them on self-funded plans because they are the only PBM that passes along all refunds to the (business) customer.  I can’t verify this, I have no skin in this game – I’ve never stepped in a Costco, believe it or not – but I thought it was interesting and timely.

Apr 13 2019 at 12:41am

The Trump administration has a upcoming change that would require all rebates go to the consumer.

Big Pharma is against it, of course. Which is weird…why would they care who gets it if its a true rebate? Seems like its confirmation that the current rebate is payola.

Apr 15 2019 at 10:08am

Oh this again.


Always useful when discussing drug companies (not our friends) is that they are not a magic industry of super profits.

One of the underlying ideas people often have about drug companies is that the profits of the drug industry are unnaturally large and inspire amazing efforts to continue these ungodly profits.  The industry is approximately 450 billion dollars in the US.  By comparison, the auto industry in the US is 700 billion dollars.  The profit margin in the US is 14% – very average and below software, financial services, banking, beverages (!), transportation, etc.  This is a reasonably sized industry with average profits.  Like any industry it is subject to corruption and it is not on a moral crusade to heal us anymore than academics are on a crusade to educate us and find truth.  Academics crave fame, money and tenure and drug companies crave easy money, avoidance of responsibility, and restriction of their competitors.  There are no angels here  but drug companies as an industry are not special.  I think because people don’t understand them but do understand Coca-Cola they have a special ire for drug companies.

Russ Roberts
Apr 16 2019 at 2:19pm

I asked Robin Feldman to respond to the comments above by Philip Summa and Kirk. Here is her response:

As a patent law professor (and someone who runs a clinic in which students perform freedom-to-operate patent analyses for early stage, life science companies), I am quite familiar with the obviousness doctrine—both its theoretical underpinnings and the way in which it can fall short in practice. For a discussion of how I would clarify and strengthen the obviousness doctrine, please see that section of the book. (I suspect Philip may have misinterpreted the discussion in the podcast, which focused on beefing up the existing obviousness doctrine and its application in practice.) The same section of the book also contains observations on the doctrine of obviousness-type double patenting, which Kirk mentioned.

The drug I referenced, for which a coating was added, already had a protective coating for the acid environment of the stomach. The second coating, wrapped around the first coating, was entirely ineffective and did nothing. For this and additional examples of secondary patents (sometimes called “me-too drugs), please see my new book, Drugs, Money, & Secret Handshakes, my prior book, Drug Wars, and my peer-reviewed empirical piece, May Your Drug Price Be Ever Green. For another author’s piece on the lack of convincing evidence that patients experience any improvement from using an L-isomer (the so-called left-handed version) such as the Nexium rather than a racemic mixture (the left and right-handed versions together) such as Prilosec, see

Robin Feldman


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This week's guest:

This week's focus:

Additional ideas and people mentioned in this podcast episode:

A few more readings and background resources:

A few more EconTalk podcast episodes:

TimePodcast Episode Highlights

Intro. [Recording date: March 9, 2019.]

Russ Roberts: Our guest today is Robin Feldman.... Her latest book is Drugs, Money, and Secret Handshakes: The Unstoppable Growth of Prescription Drug Prices.... You call the rise in drug prices unstoppable; and I know that's to get my attention, which it does. Let's start with the question of how much they've been growing recently. We see some headline stories, some appalling--multiple increase of x-hundred percent in some crucial drug; and that gets people's attention. But, what's going on overall?

Robin Feldman: So we look overall, even from that perspective, the price of medicine has skyrocketed. Medicare spending for brand-name drugs, even after accounting for rebates, still rose 62% between 2011 and 2015. I don't know about you, but I'm not bringing home 62% more salary than I did 4 years. Ago. Now, the prices for new drugs and where conditions, some of the ones you were referencing, are causing their fair share of pain; but drug companies have raised prices most sharply for commonly-used medications to treat things like diabetes, high cholesterol, asthma. Those price rises are causing real pain for people.

Russ Roberts: And, talk about--you mentioned in passing--rebates. Most of the things that we often hear are list prices. But there are rebates. And, how are those working? How do they literally work, and how does the market, all the different players, how do the rebates work?

Robin Feldman: Ah. The rebate system is marvelously complex and difficult, but if you step back, it's one very simple thing: The drug companies are able to play the middle players, who are known as PBMs [Pharmacy Benefit Managers], as well as some hospitals and some doctors, to make sure cheaper drugs are left out. That's all it is. Drug companies pay everyone along the way so that lower-priced drugs lose. They are simply sharing their monopoly rents to keep competitors out. What's interesting and makes it complex is it's all wrapped up in secret deals that even the government and health plan auditors are not allowed to see. Now, I mentioned for you these PBM brokers. If you are looking for an easy score-card to tell you who's on first, the pharma industry will always disappoint you because it's got all these funny acronyms. But, at the center of this system lies these PBM brokers--

Russ Roberts: Which stands for?

Robin Feldman: Pharmacy benefit managers. Not any better in full than it is in short. So, PBMs negotiate discounts from drug companies, and then they help the Plan decide what it should charge patients. So, the PBM works for the Health Plans. They are supposed to be getting a good deal for you--for the patient. However, the drug companies have very cleverly turned that system on its head. Before they give a discount to the PBM brokers, they raise the price each year. And then the PBM claim to have negotiated a great deal. And everyone's happy. It's a little like a department store raising prices right before a sale so that the sale price looks appealing. You lift it up, and then you give a rebate, and everybody looks like, feels like they got a good deal. Now, that might not be quite as bad if nobody paid those high-list prices. But, people do. So, for those of us who have health insurance through our employers, 30% have the type of plan where you have to pay 100% out of pocket until you reach a deductible. And, that out-of-pocket cost is based on the high list price. Many people have plans that have what's called 'co-insurance'--you pay part when you pick up your drug. If it's co-insurance--rather than co-pay, which is done a little differently--that's based on the list price. Many people don't have drug coverage. Or, they have no coverage at all.

Russ Roberts: What about Medicare?

Robin Feldman: Well, Medicare is a Federal program that is administered by the states through individual, private plans. Even though it is a Federal program, the Federal government is restricted by law from negotiating directly with the drug companies. Now, those negotiations happen at a different level. They are distributed, and each individual plan, through its PBM, negotiates the drug prices. And again, within that system--so, you may have plans that have co-insurance. You may have plans people opt for where they don't have much drug coverage. And even within those who are eligible for Medicare, there are many people who haven't got a Medicare plan.


Russ Roberts: The strange thing about this market and this PBM/pharmacy-benefit-manager component, is that: There are only three--there are 3 very large firms in that market. I know one of them is Express Scripts because it used to be, probably still is, according to St. Louis--I used to know of them when I was teaching at Wash U. [Washington University in St. Louis]. They came into the market to try to make life easier for drug companies--for health care, for health insurance--to manage this very complicated, increasingly complex world of benefit structure, and list different kinds of drugs. And they seemed to me the kind of middleman that would normally make things better. So, why--first of all, am I right that there are three? How important are those three in the landscape? How much do they dominate it? And how did it get started?

Robin Feldman: You are absolutely right: 85% of the PBM market is dominated by the Big Three players. And they tend to move in lockstep. I have talked to large employer plans who have tried to negotiate for transparency or other types of different terms from the PBMs, and they are completely shut out. It's a very small, and a very tight and powerful market. They started out, historically, just processing claims--massive number of claims and paperwork to try to connect all of the pieces for a health plan. Very complicated. When we began to shift to digitization in this country, then the service the PBMs were offering became pretty commoditized. And so they had to try to figure out how to offer a service of value. They switched to, 'In addition to processing all your claims, we'll negotiate with the drug companies.' And that's how we came to where we are today. Now, in theory, if you have somebody like a broker negotiating a deal for you, that should be pretty good; especially if their pay is based on how good a deal they might get. But that's not how things have played out in practice. The incentives within the system push in the wrong direction. So, first of all, the PBMs get their payments from the drug companies in two forms. One is in the form of the rebate. So, the rebate will come later in the year, long after John Smith has bought his hard medication. And it will come to the PBM, who could pocket it or could pass it on to the insurance company. Now, all of the agreements about how much should get passed on and in what circumstances, those are all held deeply secret. Um, the health plan, who is a client, is not allowed to see it. Um, neither are the government auditors. All of the details of these plans are kept completely secret. In my view--I like to say, 'Markets, like gardens, grow best in the sun.' This type of hidden, back-room dealing, is not good for competition.

Russ Roberts: Normally, that just wouldn't happen, in certain markets. In real markets, I would say. That is the way I would describe it. Usually, you wouldn't go to a middleman to shave off some portion of the profit unless they provided something of real value. And I think part of what this illustrates--and we're going to get into it in a little more depth--is how abnormal, psychotic, toxic, non-normal health care market is. And I just say this because it has to be said: People all the time tell me, 'Well, we know free markets aren't good in health care,' because look how bad, say, pharmaceutical market is. Well, it's not a free market. It's distorted in all kinds of ways. And some of the ways we are going to be talking about today. But, the other point I want to make and get on the table is that, having read your book, Robin, you are not demonizing any of the players in any direct way, because you are explaining--which is why it's a great bit of economics--how all the players are just responding to the incentives; but the incentives are not particularly well-designed. And they didn't emerge from market forces. They come from, often, attempts to control the market, by legislation. These incentives are in place. And that's the biggest part of the problem. Not some evil conspiracy on the part of drug companies or PBMs. They are just trying to do what they are made to do, which is make money.

Robin Feldman: These are, you have to remember[?]--these are profit-making entities. They are going to respond to the incentives that we put in place in their own interests. Now, imagine if the CEO [Chief Executive Officer] went to a Board of Directors and said, 'I'm going to lower prices and reduce our profits. It's the right thing to do.' That CEO would be fired. That's not what a company does. You don't have perfect market in health care because you have third-party payers; you have a variety of other forces happening. But you can have a functioning market within that system. You just have to allow the right incentives to flow. Then we can get the kind of competition that gets the innovation we need. It's not where we are right now. But it is certainly possible. We are pretty good at markets in this country.

Russ Roberts: I just want to say that of course, many CEOs announce to their Board: We are going to lower our prices; and we're going to make higher profits, because if we don't lower our prices, our competitors have. And we're going to go out of business.' So, this is a market where, because of a lack of competition--some of it due to the nature of the product; some of it due to government protection--the competitive forces are just not in place.


Russ Roberts: I want to talk about, a little bit more about the Pharmacy Benefit Managers, the PBMs, for one more bit, and then get more into the incentives. But, tell us what the Formulary is. Because, it's a rather striking thing that--again, most of us are simply not aware of. We go into the doctor. The doctor writes us a prescription. We almost never say--I do, because I'm an economist and I read your books--we almost never say, 'Is there an alternative?' We just say, 'Oh. Well, that's what I need. That's what I'll send to the pharmacy.' I go to the pharmacy; I say, 'Could you fill this, please?' They do. That's the end of the story. Usually. And there's a thing working in the background, part of which we talked of is the pricing. But there's also this thing called the Formulary. So, describe that.

Robin Feldman: The Formulary is specific to a particular health plan. And the Formulary will decide whether you the patient, who is the customer of that health plan, can get reimbursed for that drug, and what level you'll get reimbursed. In other words, does your plan cover it? And there are often up to 5 tiers in health plans; sometimes even 7. And those tiers will determine, um, whether you can access and how much it costs. But those tiers have become a way that the players in the market--specifically the PBMs and the drug companies--have figured out how to drive people into the more expensive drugs. In a way, of course, that benefits the various players along the way. The name of the game in this is: volume. So, a drug company that has a lot of volume with a particular PBM, or a hospital--same kind of deal happens with hospitals--so, a drug company with a lot of volume can offer a better deal in exchange for excluding rival drugs from the formula. Or, just making sure that the rival drug has a disadvantaged position. So, let me give you an example with some simple numbers. Imagine a large company saying to the PBM, 'I'll give you a dollar back from each of these millions of bottles of mine that you sell, if you agree not to put my competitor on the menu.' So, that's worth--if you are a PBM, that's worth millions of dollars to you. Now, if the competitor--particularly as a new entrant or a new generic--starts out selling only a thousand bottles, how could it ever compete? That new entrant could never offer enough off its thousand dollars of bottles, or a thousand bottles, to compensate for the millions of dollars of the PBM would have to forego. And it gets a little worse here. Some patients will always need their prescription filled with the brand name drug. Maybe they have a reaction, or a special condition. Or maybe they are just wooed by advertising and they get their doctor to write, 'No generic, no substitutions.' Whatever the reason, the health plan will have to fill some prescriptions with that high price. So, if I'm a PBM, or a health plan, and I spurn the attractive deal offered by the drug company, I'm going to have to pay that ridiculously high list price. And all of us know that could break the bank. So, when the brand drug calls, company comes calling, the big company, and offers to deal with a PBM, that's a deal that even the PBMs and health plans can't afford to turn down. That's kind of a power that just speaks volumes. Literally.

Russ Roberts: A good one. I'm going to read an analogy you make; and I love this analogy for a couple of reasons. You say:

The more volume rebates a drug firm can offer the PBM, the better deal it can command to exclude its rivals. It is a little Budweiser approaching a bar owner, saying, "Okay, at the end of the year I'll pay you 50 cents a bottle if you've sold 40,000 of Bud. Better yet, I'll make it $1 a bottle if you don't put any of that microbrewery's beer on the menu." If the microbrewery sells a limited number of bottles, how could it ever compete? The microbrewery could never offer enough off the price off its few beers to compensate for the tens of thousands of dollars the bar owner would forgo by rejecting Budweiser's offer. The point is simply the following: The greater a drug's volume, the more the drug company can spread out a persuasion plan across each unit of drug sold.

And, some conversation on this program we took with Matt Stoller about how competitive the beer industry is; and I'm sure Budweiser tries to do things like that. A bar owner has to decide whether they are only going to be an attractive place to come on a Saturday night if they only have Budweiser. So, there's a cost to excluding the microbrewery. And, even if they succumb to that--even if they think, 'Oh, there's not that many bars around. I think I can get away with it,' the microbrewery will open its own microbrewery and will compete with the better beer, if you think the microbrewery--if there are people who wish to consume the microbrewery's product. We are living in the heavenly time of, I think, the greatest number of craft breweries in American history. There are 5000 small, independent microbreweries out there. The beer is fantastic. It's the golden age. So, that's working, despite the urge of Budweiser to do that. But that won't work in the drug case, will it?

Robin Feldman: It absolutely won't work. In part it's because government has put its thumb on the scale in a way that the drug companies have figured out to use to their own advantage. Before I shift to that, if it's all right, I'd love to just give you a couple of examples of where this is actually happening.

Russ Roberts: Sure.

Robin Feldman: Because it's great to talk in theory. And even though these deals are secret--

Russ Roberts: [?]

Robin Feldman: Yeah. These deals are secret, but it's starting to leak out. And law suits, sometimes in contract disputes between the parties themselves--amazing what you can find when people start fighting with each other. So, let me give you a couple of examples. In October 2017, Shire sued Allergan alleging that Allergan used bundled rebates--that is when you spread your volume across a bunch of drugs--to preserve its dominant market in the blockbuster dry-eye medication Restasis. This should be familiar to you from the Indian Reservation snack food that was tried. So, in this case, according to one Medicare plan administrator, given Allergan's bundling scheme, the new competitor could give its drug away for free--numbers still wouldn't work. As we were talking about with what Budweiser wishes it could do. So, I could give you another one. This is again a case filed in late 2017, and this one is Johnson and Johnson's rheumatoid arthritis drug Remicade. So, according to the complaint, after the patent protection expired, and just weeks after a bio-similar came on the market--that's a cheaper competing drug--the company began a bundling scheme that induced hospitals and health plans to essentially exclude the lower-priced copy, even though it was covered by government plans. So, I could give you--I can go on and on and list some of these. The point is that we are seeing it happen in the real world. There is a wonderful quote from one doctor who said, 'It's Alice-in-Wonderland time in the drug world.' I would say it's Alice-in-Wonderland time except it's our money going down the rabbit hole. You had asked me before, though, about--

Russ Roberts: Yeah, the thumb.

Robin Feldman: So, what's the thumb on the scale? So, why is it that drug companies have become very adept at using their monopoly positions, their government-granted monopolies, in order to try to put in place these types of deals? So, companies begin with a position of monopoly from a patent that they have, or from more than a dozen of what are called non-patent exclusivities that companies can get for doing things like testing drugs in children, or working on rare pediatric diseases. Whatever it is. Orphan drugs is one people may have heard of. So, they get additional periods of times for protections. And, companies use these to amass the volume positions and create contract terms that will hobble the generics when they finally get to market. And, as I mentioned: Companies are absolutely masters at repeatedly extending their protections. So, in fact, I show in my research for the book that drug companies are largely recycling and repurposing drugs rather than inventing new ones. More that 3/4 of the drugs associated with new patents are not new drugs coming on the market. They are existing ones. So, instead of innovation, we are seeing secondary patents piled onto new drugs over and over again. We want drug companies to go back to the bench and invent new things. This is channeling innovation in a less productive direction.


Russ Roberts: But the question I have, and I'm not sure it's answerable--I'm going to ask it two different ways; you can figure out which is maybe the best way to get at this. So, this is a horrible system. The way you describe it. If it's accurate. And it seems, based on these kind of, the small pieces of information we have from these documents that are revealed in lawsuits, that this is an extraordinarily byzantine and not-so-helpful structure for how drug prices get set. So, the first question that comes to mind is: Why are there only 3 big ones? Why aren't there PBMs able to compete by offering a more transparent deal? Why doesn't somebody start a transparent one, and do a better job, and get rid of all this, what looks on the surface to be exploitation?

Robin Feldman: Well, it wouldn't be in a PBM's interest to get rid of this and to operate transparently, because the PBMs' revenue and profit margins have been rising rapidly in recent years. Again, it's the incentives within the system that are driving the behavior that we have. The profit margins for companies on their drugs is about 76% in terms of the marginal cost, once you have the drug in place. It goes back to why companies are incentivized to try to make secondary changes to a drug rather than inventing a new one. Well, the R&D [research and development] is much less when you make a secondary change to a drug. So, when a company makes a secondary change to a drug, like adjusting a drug's dosage, the R&D investment is far less than required for the drug's initial development. So, you may get a change that means very little from a therapeutic standpoint, but you get a lavish reward in return. That's what the drug company is going to be driven to do. The same reason we see PBMs driven the direction they are there, because, well, that's where the profit is.

Russ Roberts: I understand why they do what they want to do. I don't understand why the drug companies and the health insurers put up with it. Because, it would seem to me, they should--if this is really going on, and they are taking a big slice, this complex rebate process and the use of formularies to keep out competitors: Why wouldn't the drug companies just work directly with the health insurance companies? Let the health insurance companies negotiate the deals; cut the PBMs out of it; and then everybody will be better off. Now, whether the patient is going to be is still a different question. But, it seems like both the health insurers and the drug manufacturers are being taken advantage of by the PBMs.

Robin Feldman: And that's a key question I spent a lot of timing researching and thinking about. Why can't the big insurers bargain against this? Why don't they? Now, certainly there are many small, regional plans who don't have much power; and one can't underestimate the complexity of the volume flow of claims in these ridiculously complex agreements, and what it would cost them to try to edit all of those, to audit all of those to bargain for the terms they want; then to make sure that the terms are going through. They are not going to be able to do that. But, how about the big plans? We've got big players out there. Why would they ever allow the PBMs to push them into a system like this? They are not naive waifs. And, the answer, I think as always: It's a pretty simple piece of economics. The health plans' short term goal is to keep this year's payments--to the PBM and through the PBM to the drug companies--but the goal is to keep this year's payments as low as possible. And remember that volume agreements can work so that those who are already in the market and have a high volume can offer deals that the cheaper entrants can't match. So, to the middle player, the price is cheaper this way, even if the long-term consequence is to block out the cheaper competitor. And, when a health plan with market clout asks for rebate pass-throughs or access-to-claim terms, the PBMs are starting to offer price-protection contracting. So, with a price-protection contract, the PBM promises the plan that prices won't rise, say, more than 2-4% a year. And then tells the plan, 'Why bother with all the grubby details, expensive to sort through? You care about the bottom line. That's what we'll guarantee.' So, in this way, the health plans' short-term interest in controlling price increases is satisfied without having to sacrifice things that the drug companies want; and that, of course, helped line the pockets of all the intermediary players. Again, it comes back to: What are the incentives driving the system? And they begin with the power that the drug companies have from the patent and exclusivity systems, and their ability to string those out, pile those on, one after another.


Russ Roberts: Well, I think part of the problem, also, is that the health-insuring industry is also not very competitive. They can pass on increases if they have to--to employers, since many of those systems are employer-based. Employers then can charge a higher price for the fringe benefit that they offer of medical plans, medical coverage, as long as it's not too much, it's not so bad. Since nobody has spent--so few people are spending their own money, there's not as much care taken as to whether the money is being well spent.

Robin Feldman: It is a problem when somebody else is paying for something that I can enjoy. You know, I may not watch my pocket quite as carefully. And, there are other problems in the health care market: My life and my comfort to me may be of infinite value in a way that is irrational. Health care spending is sometimes irrational. But, every budget has a limit. And, it doesn't take fancy mathematics to recognize that we are going to approach the point at which these price rises and the real spending going out isn't sustainable. There are--by the way, there are provisions of the Affordable Car e Act [ACA] that are making things worse; that even more distort what is happening here. I'm happy to discuss them--

Russ Roberts: Yeah, talk about that.

Robin Feldman: Yeah. I like to refer to them as ice cream and donuts. So, consider what's called the 80/20 Rule--and this is in the Affordable Care Act. It mandates that health insurance companies have to spend 80% of their premium dollars [i.e., money taken in as premium payments by customers--Econlib Ed.] on medical claims--as opposed to profits or administrative costs. Sounds good. After all, limiting profits for health insurance is, should keep a lid on premiums. But, not so fast. So, think of it this way. If Mom says, you can have 10% of a bowl of ice cream, a smart kid will say, 'Make it a bigger bowl.' And that's exactly what happens. If health plans can only have 10% of premiums of their profits, well, of course they are going to want higher premiums. And so, higher drug costs play into that. And then the health plans have less of an incentive to push back on rising drug costs, if those costs help lift the profit ceiling. That's not what[?] health designed [?] economic incentive. That's my ice cream. Let me give you donuts. So, under the Affordable Care Act, once a Medicare patient reaches the out-of-pocket threshold, the government steps in and picks up 80% of the tab. This is what's known as reinsurance. It's not really insurance. It's the government pocket--

Russ Roberts: It's my pocket, Robin, by the way. And yours.

Robin Feldman: It's my pocket. Your pocket and mine and everybody else's out there who pays taxes. If a Medicare plan gives preference to an expensive brand over the generic, the plan saves money, because that super-high brand price quickly pushes the patient through the donut-hole, and the government picks up 80% of the cost. Good for the plan. Great for the drug company. Bad for taxpayers.

Russ Roberts: Yeah. Who aren't of course paying terribly close attention all the time.

Robin Feldman: And the Medicare patient's cost-sharing obligation, by the way, in this fancy plan, is based on the high list price. So, the patient gets socked with higher cost-sharing in all of this. So, it's the taxpayers who are paying to subsidize it, and the patients who are opening their own wallets.


Russ Roberts: Now, the pharmaceutical industry will respond to this with a couple of claims. All of which have some truth to them. And I'm curious how you respond to this. So, one of the claims is that, 'Well, all these profits from drugs,' that eventually--much of them do flow to pharmaceutical companies, not just to the PBMs or the health insurers, 'that's great because that leads to more innovation. We need the drug approval process'; it's incredibly expensive, as you point out in the book. It's not an easy question to answer, how much it takes to bring a successful drug to market, but it's an enormous amount of money to prove safety and efficacy. It might be a billion or more. It's at least hundreds of millions. So, 'We need these profits to sustain, to overcome the costs of development and regulation. And also to make up for the drugs that don't make it: that aren't worthwhile, that aren't successful.'

Robin Feldman: So, I always want to start by saying that the drug companies have brought extraordinary innovations. That is important for society. And, those innovations should be handsomely rewarded. That's how the system is designed to work. After a period of time, however, we want competition to step in and drive prices down. And we want the companies to go back to the bench and start inventing. The system has developed in a way that distorts what we are seeing. So, when you have 3/4 of the drugs with new patents not new drugs but existing one, we are not getting the full innovation return on our patent investment. Se are getting a recycling and repurposing of what exists. We are distorting. So, those large numbers of how much it costs to develop a new drug: Those are for the new drugs. For what's probably less than 20% of the market, according to most estimates. But, 80% of what we've got out there don't have those costs. And they are not necessarily the innovation we want. So, the cycle of innovation/reward/then competition, is being distorted into a system of innovation/reward/more reward and less-valuable innovation.

Russ Roberts: So, we talked about this in our previous conversation. I want you to go into it, as you do in the book, this latest book. I don't think most of us have any idea of what these secondary patents are. And, I've always just assumed, well, 'If it's patented, it's like a new thing; and that's great.' It's shocking how unhelpful many of these so-called innovations are, and these new patents that are just a re-patenting--a river[?] term you use. So, talk about what things that are qualifying as, "new patents."

Robin Feldman: So, many of these secondary patents are minor changes in dosage or delivery system. It could be a two-times-a-day pill into a three-times- or a three-times-a-day pill into a two-times. Some of them are merely combinations of existing medications that could be purchased individually for a lot less. So, let me give you an example. There's a drug called Treximet. It's a migraine medication that combines an old migraine medicine and Naproxen. You can buy those two separately for about $10 or $15. Treximet--which is just the two pills mixed together--cost over $800 for 9 pills. That's an extraordinary price difference. Now, we were, I was talking about the minor tweaks in dosage or delivery system. That may be of value, to some extent, to some patients. It doesn't mean it has no value. But, it doesn't have the kind of value that we would want for another decade or two of protection. That's really not what we're trying to incentivize. I think--I think if you step back and think about how our system is working or not working, the Patent and Trademark Office doesn't work whether something is better. Whether it delivers much value at all. It just asks whether it's different. And in this country--as opposed to some other countries--the FDA [Federal Drug Administration], when it approves, doesn't ask whether something is better or delivers much value. It just asks whether something is safe and effective. Nobody is asking that question in our system. And, it's a problem for the incentives.


Russ Roberts: But that's the heart of the problem. You can debate what the heart of the problem is; and I have one other one that I want to share with you in a minute. But in many ways, this is the crux of the issue, this issue of patents and the ability to get a monopoly and to keep out generics. So, as I mentioned before when we talked; I think most of us think, 'Oh, you get a patent; you get monopoly pricing for x years. Depends on how long it took to get it to market. But then, the generics come in; the price drops.' And that does happen occasionally. But this idea of secondary patenting is where you just change--you tweak it. And you continue to get the monopoly profits and make it harder for generics--either illegal or difficult--for generics to get a foothold. And that's just like shockingly bad. And clearly the idea that you could patent something that's just a tweak on what your previous idea was and extend the power is not what anybody--any economist--would say. Unless we're under-appreciating, say, the new delivery system. That new delivery system makes it sound like it's a--you know, a rocket launcher versus a hand-delivered package. Or, airmail versus horse. A lot of times it's just the coding of the drug. Right? And that's just--or is that just kind an obscure, occasional example of this? Because those [?] seem to be rather--it's rather remarkable to me that that could allow for--to continue to get monopoly pricing.

Robin Feldman: These tweaks really are business as usual in the pharmaceutical system. There are some marvelous outliers. I found one drug when I was researching--it took--a drug that already had an absorption coding around it: put a different coding around it; and got a new patent for that. Sold it by a new name and a new drug. That kind of game is silly. But the basic approach of tweaking drugs a little bit? That's business as usual throughout the industry. And, you're right: Economically, it isn't something that makes sense. Now, my answer for value is simply that it doesn't take the same level of R&D to tweak a drug in that way. You should have gotten your reward from your initial patent. To the extent that this tweak has some value to the market, the market value will reward you. If some patients would rather take it twice a day rather than three times a day--well, that should be enough to compensate for the tweak that you did. It isn't necessary for the government put its thumb on the scale and give you an extraordinarily lavish reward that blocks the competitors out.


Russ Roberts: So, you gave a silly example--a different coding. And yet you find in your work that--I'm quoting--'78% of the drugs associated with new patents were not new drugs coming onto the market but existing drugs.' So, at one end we have the new coding. Maybe at the other end, we have something that works better for women than men, or better for old people than young people, or doesn't make you nauseous. I assume some of the tweaks have actual value than just the coding. But the problem I have as an economist is that some of those "improvements" are trivial. And so, as a result: It's true they are worth something. But, it should be compared, that new value, to the generic. And what this does is, unfortunately, keep the generic just out of the choice system. And that's just a bizarrely bad way to organize anything. I know in medicine--you know, people say, 'Well, I want the best.' Well, the best extends by your life extends your life by 6 days and costs a million dollars versus $10, a lot of people would say, 'I'll take the $10 one and let my kids--or even taxpayers who I don't know--take the money.' It seems wrong. Right? And that whole comparison of value versus cost is totally eliminated by this secondary patent opportunity.

Robin Feldman: There is an extraordinary distortion here. And I see it in two ways. One is what you are talking about, which is, you see a huge stampede into cancer drugs, which is inspired by the exclusivities that are available there and aren't available other places. So, you see a lot of drugs that have very little effect, if any--maybe extending life for a month or two, or maybe not--but extraordinarily expensive. Economically that doesn't make sense. You also have to think about it in terms of the comparative economics. So, let's say you've got--why are we seeing things that do small tweaks in the market? It's because that's where the returns are so high. So, sometimes you'll hear drug companies say, 'Well, if you don't let me get a reward on altering the existing drug, then I won't do that; and there may be some good changes out there that won't happen because of that.' My answer to it is: It's a comparative problem. If we were allowing market forces to work, that change, and reaching to that group of patients would be an economically attractive solution to you. It's only because we have this system that lets you make hay out of things that have very little value and cost you very little but you are going to make a fortune on it, that we are driving you into that and we are getting a distorted market from it.

































































































Russ Roberts: So, I want to raise a cultural issue which I--I'm uneasy, usually, raising cultural issues. As an economist, not quantifiable, and so in general people are uneasy about it. But, it seems to me this could be part of the problem, and I want to get your reaction. So, if I have a patent--let's talk about patented drugs that really should be patented--and earn their patent. That do something important for human wellbeing, and we're happy that we get developed. We're thrilled. And we want firms to be incentivized to find those kind of improvements and we let them make a lot of money. The question is always, 'What's a lot of money?' And, I think at some point in corporate history, drug firms felt bad raising prices enormous amounts, even though they had a monopoly. And so they didn't. And yet, today, I feel like those restraints are off. Now, there are a lot of reasons we might speculate why that's true. But, a firm that charges tens of thousands of dollars, and sometimes more--hundreds of thousands of dollars--for some chemotherapy, some kind of cancer treatment--we had Vincent Rajkumar on the program talking about treatment for multiple myeloma. It's incredibly expensive. And yet it's very good. It's a good thing for people who are helped or benefit from it. And yet, what firms charge for that seems to me is "excessive" in the following way. In the old days--excuse me, not in the old days--in a real market, your ability to charge high prices is limited by the ability of the consumers to pay for it. But since in this market, the consumers don't pay for it--rather, someone else does, whether it's government benefits for the elderly poor; whether it's a third-party payment for an employer's health insurance coverage--the sky's the limit. All those constraints are off. Now, it's true that only a few people end up paying that horrible high price. You could call them the suckers. And many people do get discounts and rebates. But, what that high price is, and the fact that anybody pays for it--it just wouldn't happen in a market. There wouldn't be that opportunity. And yet, because there's a third party involved, we're kind of stuck with the, I don't know, the cultural ability of the firm to please itself. Which is absurd. And a really bad idea. And once those cultural wraps[?] are off--it just, those increases are--now, they're going to feel bad increasing it, let's say, 1000% the first year, though occasionally we get those. But they just do it, 'Ahhh, we'll just do it 10% a year.' That's bizarre. And I just have a feeling--I hate to say that phrase, 'I have a feeling.' It sounds horrible. But, I have a feeling that those constraints existed in the past and they don't--they aren't there any more.

Robin Feldman: No, I think there are two really wonderful parts of what you were describing. Maybe 'wonderful' is the wrong word. But, there is a problem with third-party payers. But all budgets have limits. Even the third-party payer's budget has a limit to it--

Russ Roberts: Yup. Sure enough. [?]--

Robin Feldman: So you should find some limits there. But, in addition, you had a phenomenon that is difficult to discuss in economic terms, but there really is a psychological limit to how high drug companies felt comfortable introducing new drugs or raising the price of existing drugs. Once that barrier was crossed, the sky became the limit. And that, as a shift, a modality shift, is a both troubling and fascinating one. The second is, it's important to understand how those rebates work, in terms of the dollars people end up paying. So, if you are raising the price significantly every year, the bottom line price after the rebate still goes up. So, the rebates--the average rebates in a commercial plan--are reported to be--and obviously I can't measure this but they are reported to be 20-30%. So, if you are going down 20 to 30% of a number that's already gone up 60% in the last 4 years, you've still got prices rising. And then that becomes, that becomes a floor--you know, not really a ceiling; and new drugs can come out even higher than that and look cheap in comparison. Generics can just drop down a little and say, 'Hey, I'm a bargain.' You know, all of that shift in the curve is very difficult and troubling.

Russ Roberts: So, one view--let me take the industry side here for a minute. One view says, 'Okay; there's some ugly things in this business. There's some--people try to make more profit by extending their monopoly in stupid ways that the government allows, so it's not our fault. Of course, we're going to go for tweaks of composition and structure of these molecules. And we're going to change the delivery system. We're going to do everything we can to extend our [?]. But that's normal. It's not our fault that we have a stupid patent system, the way it's structured. It's true that there are these rebates and weird, labyrinthine, Kafkaesque things that happen in this non-opaque[?opaque?] delivery structure called the Pharmacy Benefit Managers. But, look: Let's look at the bottom line. The bottom line is: We have the greatest drugs in the history of human beings. We have incredible innovation in the system. Drugs--yes, they are expensive, but they are only a, you know, they are barely more than 10% of the Health Care Bill. It's not where the problem is. So, just leave it alone. It's not so important. It's not a big deal. You are over-reacting.'

Robin Feldman: Well, I would ask any one of your listeners, if they agree with that, when they are shelling out dollars at the pharmacy counter--and I would ask how people feel with the fact that the things that are covered in their health plans are fewer and fewer. And, co-pays are higher. Co-insurance is higher. The drugs that are covered are more limited. I suspect if you ask the average person, the average person would say, 'Wonderful. Marvelous economics. I'm hurting. And I don't like it.' I think that's why you are seeing pressure on Congress, and at the State House level to act--because these prices are affecting real people in very real ways. So, we can structure all kinds of numbers to say it's no problem, but the average person will tell you it's a problem.

Russ Roberts: Okay. I'm going to respond to that. But I'm keeping my industry hat on for the moment.

Robin Feldman: Yes.

Russ Roberts: Which I don't like wearing. But--because I do think it's a systemic problem. But I'm going to put my industry hat on for a moment. I'm going to say the following. 'Okay. Let's suppose the government changed the automobile market, and they started to not allow cars with certain--cars that didn't have certain features to be on the market at all.' In other words, they mandated a whole bunch of safety things--and effectiveness things--on how cars work. And so, you have to get a certain number of miles per gallon. All cars have to have certain safety features, maybe even ones that don't exist now. And as a result, it's going to push up the price of cars. It's going to improve the quality of cars, as well. So, now--I used to buy a Honda, and now, all of a sudden, I'm forced to buy a Lexus. Well, a Lexus is expensive. And, of course, I'm going to complain. And the pharmaceutical industry, and the car industry, will say, 'Yeah, but you are getting a Lexus.' It's true that you don't like all these out-of-pocket payments you have to make, and the co-pays. And, when you get to the pharmacy, you hear kind of, 'Yeah, but you are getting the greatest drugs in the world. You shouldn't complain. You should be thrilled. You've got the best car. You've got the best drugs.'

Robin Feldman: Now I'd say to that, 'I don't think we are getting a Lexus. I think we are getting a smart-car and we are paying Lexus prices, and we are doing that because of the way the government is meddling in the market.' What I would say is, 'I want to see competition reign. I would give you that we definitely need a period of protection for drug companies to recoup profits, so that they can have an innovation--a kind of incentive to go out and innovate.' But all good things have to come to an end. We need a time period for that to end. And we need real competition. And, if you can't compete, go back to the bench and invent something that can compete.

Russ Roberts: Now, we recently had Jacob Stegenga on the program talking about his book, Medical Nihilism. And, I'm going to channel my inner Jacob Stegenga for a minute. He mentions that there are only a handful of what he calls 'magic bullets'--drugs that cure the problem they are directed at and don't have a lot of side effects. And one of those is insulin. So, recently in the news there have been people complaining about the high price of insulin; that people can't afford their insulin. Insulin was discovered a long, long time ago. The reason it's expensive is part of what we're talking about; and I suspect that people who have diabetes and who take insulin are very happy at the innovations that have taken place in the insulin market and are happy that those are there. They include delivery changes in the mode of how the insulin is delivered in the body. I assume they maybe include other things about the drug itself: I don't know. But, there could be cheap insulin on the market; but there isn't. Meaning, it's feasible, it's imaginable, that someone could sell generic insulin. But I have a feeling it's not happening for some complicated reasons. Do you know anything about that?

Robin Feldman: Oh, yes--

Russ Roberts: That's my argument that says, 'Why don't you let me buy,'--you said, a smart car. I know you live in the Bay Area; but for people who don't live in the Bay Area: A smart car is a little, tiny thing. A little, small, like a mini-car. I'll just take a Kia, which is a pretty good car. A really good car compared to, say, a car of 25 years ago. It's not as good as a Lexus--today. In certain dimensions it's just as good. But, they don't let those on the market. Why isn't there cheap insulin on the market?

Robin Feldman: Well, insulin products are a classic example of drugs with extended protections. All of the top-selling insulin drugs have increased their protection by at least 20 years. Each of the top-selling insulin drugs has piled on dozens of protections. One of them, 55 protections. And again, those protections provide the kind of volume that can set up the sort of deals with the PBMs so that new, cheaper entrants can't get into the market. And can't get a foothold once they get approval. There are nonprofit organizations that are trying to come up with cheap, generic insulins. But, you can make the drug; if you can't get your way into the health care coverage--if you can't get the plans to accept them--no patient is going to get that drug.

Russ Roberts: I'm not going to quote the people who are railing against this, because I'd rather not. For a variety of reasons. But, you could understand that the fact that you could--it's not anybody's fault that they have diabetes--generally. Right? It's a disease. And to pay a high price for it, hundreds and hundreds per dose, is really unpleasant. And, it's easy to blame Big Pharma for that, because they are the ones selling it for hundreds of dollars, or whatever the price is. But, you'd think that this opportunity for nonprofits to deliver it would be a lay-up. Like, what's stopping it? I understand that Big Pharma doesn't want it to happen. I get that. Obviously they want to keep their profits high. But, it seems to me that whatever barriers there are to having nonprofits give away or sell at a very low price generic insulin, should be kind of an easy public policy problem to solve. Why isn't that happening?

Robin Feldman: Well, it goes back to what we were talking about at the beginning of the show with PBMs. So, the health plans, through their PBMs, have long term contracts. They have contracts with the drug companies about preferring their drug over cheaper competitors. If that cheaper competitor can't get coverage under the health plan, nothing's going to happen. They are not going to be able to get traction in the market. Insulin, by the way--the drugs you are talking about--that provides a wonderful anecdote for me. I was testifying a couple of weeks ago on the Ways and Means Health Subcommittee. And, one of the witnesses representing the pharmaceutical point of view was arguing that prices haven't really risen; that there is no problem; that everything is fine. One of the first witnesses interviewing him--and there were a number--I'm sorry--a number of members of Congress who were interviewing him and were taking the pro-industry position. But, even one of the first and most vocal proponents of that, looked slightly chagrined and said, 'Well, we have Type 2 Diabetes in my family, and I have to say, I can tell you that prices are rising.'

Russ Roberts: That's awkward--

Robin Feldman: It's a hard position to support.

Russ Roberts: But your example of the PBMs--I understand that for, say, a health insurance plan that's offered by an American corporation, or my university, or yours. But, can a nonprofit today sell generic--how hard is it for a nonprofit? Forget about getting in the formulary of a PBM. If I'm a group that's trying help poor people, say, who don't have health insurance, who don't have any drug coverage right now--maybe they're not poor: they're just low income. Is it hard for me to distribute or give away or sell a generic insulin product for people who are struggling with the amount of money you are talking about?

Robin Feldman: The major focus of drug distribution--prescription drug distribution--is through a health plan. If your product is not on the formulary, it's not going to get filled. It's not going to get substituted at the pharmacy. It's not going to get into the system. Those individual patients aren't going to find it. A brand company, which has lots and lots of money, can afford to advertise massively on television and reach patients everywhere. A company that's trying to make a cheap generic version isn't going to engage in that advertising. Isn't going to be able to reach those patients.

Russ Roberts: I guess what I'm thinking is: Why doesn't someone start a nonprofit pharmaceutical company that specializing in creating low-cost generic drugs that have very low regulatory hurdles for safety and efficacy because the molecules have been around for a long time. And, try to--and finance that out of a combination of donations; and maybe charge patients a small amount of money to cover their costs? And they could bypass the formulary. Bypass the PBM system.

Robin Feldman: So, I think that would be a fascinating idea. But, honestly, I'm much more interested in a market solution. Why aren't we seeing companies out there who are looking at this Rube Goldberg industry we have, where the payments are made at different times and half-thrown backwards over your shoulders and half forward, and then it goes up and down around one truck and the next to the--? Why don't we find someone who is waiving that all away and doing a direct distribution, in a way that is much more efficient and effective? There's plenty of money flowing around in this market for a much more efficient system. From that perspective, I'm fascinated by the venture between Amazon, Berkshire-Hathaway, and JP Morgan to try to figure out a way to deliver drugs to their employees more efficiently. That's an interesting triumvirate. Maybe we will see innovation within business organization. Maybe that's the way forward.

Russ Roberts: So, yet, you talk about different solutions in your book. Most of them that have been proposed by various people, most of them I would suggest are either ineffective or dead on arrival. I'm going to focus on one, and then you can tell me which ones you think are most promising. But the one that just, again stuns me--I've alluded to it earlier--is the way the patent system works. How the heck can you get a patent for changing the coating[?] on a drug and extend it, you know, for another 20 years? That just seems bizarro. Why is that the way our patent system is? It's like me saying, 'I'm going to patent peaches because my peach comes in a shiny wrapper and my competitors' don't.' So, I get a monopoly on the peach industry. That would be laughed at. Why is that working in the pharmaceutical industry?

Robin Feldman: Yeah; I don't think that's how the patent system was intended to operate. It is what we're living with. That, it seems to me--fixing that is the quickest, most direct approach you could. And that is, Congress could simply say, in the Patent Act: These kinds of minor tweaks and minor modifications are, using Patent language, 'obvious.' They are not patentable. That's not what we mean by innovation. That would be a very direct approach, and I think would go a long way towards ending some of these distortions in the market. A more complex approach is one that I describe in the book and have talked about. It's one I call 'One and Done.' And that is: Drug companies should get one period of innovation, one period of protection for its innovation. And only one. And if the time that the drug is approved, let the company pickwhich one it wants. One of its many patents. Maybe its orphaned drug exclusivity. Maybe its data protection. Let the company decide which of these at this moment is most valuable to the company. And then, that's the one. But after that, no more. So that, all the competitors know what the right is that's being asserted. When it's going to end. And then we get competition at that point. I don't even mind if it's a longer period of protection. But the notion is: Pick a period. Any period. And let it come to an end.

Russ Roberts: And when you say, 'One and Done,' you don't mean the company gets one patent--

Robin Feldman: No--

Russ Roberts: You are saying for one of its drugs, it gets one.

Robin Feldman: Yeah. The basic chemical composition of the drug.

Russ Roberts: So, is that going to end up being where they find their arbitrage opportunity? By redefining what the chemical composition is? Do you think that's--is that kind of definition enforceable?

Robin Feldman: I think that is exactly where the bargaining and negotiating would happen if Congress went in this direction. What is it that counts as a drug? What is it that doesn't? And that's where the difficulty is. But I do think it's definable. And I think you could do a very good job at it. And you would be combining what I spoke about before, which is specifying a category of things that are perfectly obvious and shouldn't be subject to greater protections.

Russ Roberts: Are you optimistic? You've been working on this area for a few years. It's great that you are ringing this bell, and telling people that this system is not a very effective system. That it's not well-designed, and it needs to be changed. There are a lot of people making enormous amounts of money off of it--as you detail. It's not the focus of your book, but, we all understand that's what's going on in the background. We all understand that people who make enormous amounts of money try to keep that system in place. Are you optimistic that we can dent this problem or make some progress?

Robin Feldman: I am eternally optimistic. I am also realistic. It's not going to be easy. What I worry the most about is legislative fatigue. That is, it is so hard: given the way that the various industries fight this, given the amount of money that's at stake, it's very difficult to get legislative changes. I worry that a few small changes will come into place. It will be so exhausting for the legislators and regulators that they'll declare a victory, bring the troops home; we'll get a little bit of improvement, but really, um, the system remains as it is, and we don't get what we need.

Russ Roberts: That's not so helpful. Got anything better for me, Robin?

Robin Feldman: Hah, ha, ha, hah. I'll go back to: I remain eternally optimistic. I do believe that this is an important moment historically. That, given the fact patients are feeling this amount of pain and are frightened about being able to afford their medications, that there is an opportunity to act. If we take it. And if we take economics seriously, and think about how the incentive structures flow, and how we want to allow competition to happen.


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