This is an infuriating and bewildering book.

It is infuriating because it should make readers angry about the many forms of greed and abusive practices that American health care policy has allowed to develop and thrive in the pharmaceutical business. Feldman explains myriad aspects of the marketing chain and how at each step either exploitation or incompetence leads to higher prices. As a resource for a dedicated reader, it is a good place to look for reasons to get angry.

It is bewildering in part because the games and manipulations are hard to follow, but also because either there is no really good way to tell such a complex story, or Feldman has not quite found it. Part of the problem is that it resembles a collection of law review articles, with at least a third of the material left in the notes. That is 65 pages of notes plus 112 pages of text, with the print being smaller in the notes. But, unlike in a law review, these are endnotes rather than footnotes, forcing the reader to jump back and forth and back and forth. The book is organized by process, with an introduction and overview chapter followed by sections on “Pharmacy Benefit Managers and Insurers,” “Pharmacies, Doctors, and Patient Groups,” “May Your Drug Price Be Ever Green” (manipulations of the patent system and other sources of market exclusivity), and finally a chapter on “Solutions.” While I cannot think of an obviously better approach, the fact is that these topics overlap. For example, pharmacy benefit managers (PBMs) deal with pharmacies, and manufacturers' gaming of the patent system works in part because of how that process interacts with the marketing system. These overlaps make the account seem repetitive. This would be less noticeable if the articles were read separately, but in book format it stands out.

Even with the notes, the book is also too short in some ways. PBMs, for example, are a key part of the story. It would be helpful to have some explanation of why they exist at all and how they came to be—in essence, what incapacity among insurers they were developed to counter (and which, in practice, they make worse). For example, do PBMs exist in countries with national health care systems? I think not; apparently, for example, not in France (Pharma Letter1995). Why? What is it about our system that encouraged the creation of this gigantically expensive and profitable step in the payment flowchart (nicely illustrated in the book's figure 2.1)?

Feldman's analysis is a deep dive into one perspective on the problem: that prices are too high because competition is not doing what it should do through market processes. She argues compellingly that competition is not working in part because of flawed government policies (i.e., governing aspects of the patent system, and much more) and in part because of exploitative behavior that should not be allowed (such as secretive rebate schemes between drug manufacturers and PBMs). She identifies all sorts of mostly unintended consequences, such as how government reinsurance for 80% of cost above the catastrophic threshold for Part D Medicare coverage encourages higher prices—as do rules about rebates from pharmaceutical companies to Part D plans (39–40).

The book offers dozens of examples of socially perverse behavior that should make it required reading for any congressional staff drafting legislation. Consider, for example, rebates from drug companies to PBMs. These often are based on bundled product sales or volume of sales in a way that encourages the PBM to skew formularies against their customers' interests (20–29). Even more fundamentally, the system of rebates means that health insurers do not actually know what they pay for each drug:

The health plan knows how much it pays to the pharmacy at the moment the patient buys the drug, but that payment reflects the list price. The PBM will send a rebate check to the plan later in the year—a check that may represent many drugs and many transactions. Thus, the actual price of a particular drug transaction is buried within payments that the health plan receives in large chunks some time later. The plan never knows the net price the drug company receives from the PBM. (14)

The informative twists keep coming as you read. For example, higher brand prices may lead not to higher generic sales but to higher generic prices, through versions of shadow pricing (30). Feldman describes PBMs as essentially travel agents, but agents who are getting paid off by the cruise lines, here the manufacturers (31). She explains why it is difficult for any single insurer to take on the PBMs, but they also cannot collaborate because that would violate antitrust law (34). There are a number of situations beyond Medicare in which payments of rebates, or rebating portions of discounts, encourage high base prices (e.g., 51–53). Chapter 5 demonstrates clearly the range of perverse measures to create patent or other exclusive marketing rights without innovating in any socially useful way.

Unfortunately, Feldman's story is not just of unethical businesses but of weak government. In many cases she describes instances where regulators (such as the US Patent and Trademark Office and the Federal Trade Commission) or the courts allowed behavior that, on the face of it, is hard to justify as necessary to encourage useful innovation (27, 52–53, 68). As she points out, compromises made to enact legislation often provide much bigger loopholes than might have been expected (69–70). For example, provisions for higher prices for “orphan” drugs have been manipulated in all sorts of clever ways, from “spillover pricing” to “salami slicing” (80–82).

The book's focus on flawed competition in the pharmaceutical industry, however, might cause readers to miss a couple of possibilities. One is that some of what the book identifies is not confined to pharmaceuticals. Insurance companies are about as weak and inept in dealing with American hospitals as with pharmaceutical sellers, for many of the same reasons. Insurers find it easier to exercise their own market power against their fragmented customers (employers) than to crack down on concentrated suppliers, whether those be PBMs or academic medical centers. The wide variation in prices paid for the same service by multiple insurers to the same hospital and to different hospitals by the same insurer suggest that insurers do not have a much better idea what they are buying in the hospital than in the pharmaceutical sector. The other factor is that a lot of these dynamics are possible because the government does not set prices. For instance, exclusivity allows sellers to price abusively only if they get to set their own prices. Feldman notes the Congressional Budget Office's doubts about the effectiveness of government bargaining for Medicare (92), but systemwide price regulation could have much more dramatic effects.

For all these reasons, this book can be a difficult and frustrating read. Yet committed health policy and legal scholars should find Drugs, Money, and Secret Handshakes a highly useful guide to the ways in which the market and market-regulatory arrangements for pharmaceuticals in the United States are nearly unbelievably screwed up.


The Pharma Letter
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Potential for PBMs in France?