Drug pricing parity and the new TrumpRX.gov deal explained in plain English
KEY TAKEAEWAYS
UnitedHealth margins shrank to 18%, Cardinal Health to 3%, while AbbVie’s sits at 83%
Drug companies hold pricing power due to patents and lack of substitutes
US government is the largest health insurer through Medicare, Medicaid, CHIP, VA
Americans pay 2–3x more for drugs than foreign buyers due to weaker bargaining power
Pfizer deal with White House pushes for drug price parity
MY HOT TAKES
Healthcare feels expensive not because of inflation, but because we get less for more
Pharma, not insurers, is the true profit center in the healthcare chain
Government intervention is inevitable given its role as biggest buyer
Price parity is capitalism being nudged back toward equilibrium
The US has been subsidizing the world’s drug costs for decades
You can quote me: “Today’s Pfizer deal wasn’t a political win—it was a win for free market economics.”
Drugged up. What is the first thing that comes to your mind when you think of your health insurance? Let’s go with your second thought because we want to minimize foul language in this PG-13 newsletter/blogpost. 🤣 I am sure that despite whatever profanity that is now swimming around in your head, the common theme is: we are paying too much!
It seems like it is out of control, but in reality, even though the healthcare segment of CPI remains one of those so-called “sticky” bits of inflation, insurance premium inflation is relatively tame. However, it feels out of control because really, at the end of the day, we are getting a lot less for our premium dollars. Take a look at the following chart and keep reading.
This is a chart of UnitedHealth Group’s gross margin going back to 2005. You can see that today; the company earns a gross margin of around 18%. However, that is low compared to its historic margins which were in the 25% range. I am sure that you are not surprised that the company’s margins are under pressure, as provider healthcare prices have been going up. And I am sure that you have heard that non-generic pharmaceutical prices too are on the climb as well.
Who do you think UnitedHealth Group’s biggest suppliers are? Well, topping the list is Cardinal Health, a pharmaceutical distributor. Check out the following chart and keep reading.
This is a chart of Cardinal Health’s gross margins going back to 2005. That big dip in 2009 came from its spinoff of CareFusion, which distributed higher margin clinical and medical products. Margins expanded in the mid-20-teens as a number of key blockbuster drugs came off patents and their generics allowed for greater margins. As you can see, that was short-lived with its margins compressing in a downward trend to where we are today, right around 3%. If you look at Cardinal’s top suppliers, they are AbbVie, J&J, Bristol-Myers Squibb, Eli Lilly, Pfizer, Novo Nordisk, Gilead, Amgen, Roche, and Merck. Ok, ready, try to read the next sentence in one fell swoop. Some of those companies’ most popular drugs (in order) are: Skyrizi / psoriasis, Stelara / Crohn’s disease, Eliquis / blood thinner, Mounjaro / blood sugar - weight loss, Prevnar / pneumonia vaccine, Ozempic / blood sugar - weight loss, Biktarvy / HIV, Enbrel / arthritis, Herceptin / breast cancer, and Keytruda / cancer. Good job, now take a breath. I am sure that you have heard of some of these or seen the commercials. To give you some context, Bristol-Myers Squibb sold $20.7 billion of Eliquis last year, Novo Nordisk sold $17.5 billion of Ozempic, and Merck’s Ketruda earned it $29.5 billion.
That’s a lot of billions, but that’s also a lot of lives saved and made better. So, hats off! But, as we have been told, developing those drugs is expensive and time consuming and they are only patent-protected for 20 years. With trials and regulatory proceedings, some of these drugs are only protected for 8 - 12 years. It is in that window that the producer must not only recoup its investment but also make a profit and keep its shareholders satisfied. Because many of these drugs have no substitutes, drug companies have significant pricing power to charge customers high price points.
Let’s get back to AbbVie, Cardinal’s top supplier. With drugs like Skyrizi, which earned it $11.7 billion last year, it must make quite a healthy margin. Check out this chart and keep reading.
This is a chart of AbbVie’s gross margin going back to 2011. That’s right, it rose from a super-healthy 70% to around 83% where it is now! 💥 Let’s look back up the chain. UnitedHealth Group buys pharmaceuticals from Cardinal Health who sources them from drug companies like AbbVie. Health insurers are making 18% margin, distributors, around 3.5%, and the big pharmas 83%. That’s a lot of profit between yours and my pockets and the manufacturers of those drugs. Could AbbVie simply charge less and give up some of its healthy margins? Sure, but why would they? This is capitalism, and AbbVie is a rational firm whose sole purpose is to maximize profit! If AbbVie charged less, the insurance companies like UNH might be able to lower premiums, or provide its customers with more! But why would they? This is capitalism, and… well, you know the rest.
Look, it should be clear that big pharma is in the position of power from a profit perspective and it is reaping the biggest profits–as deserved. If someone were to disrupt the apple cart and try to lower healthcare costs, it should be obvious where to start.
Do you know who the biggest non-private healthcare insurer is? You guessed it, the US State and Federal Governments. Think Medicare, Medicaid, CHIP, and VA! That’s a lot of money spent on 💊💊. I am hoping that you understand why it is a dream goal of both parties to tackle drug pricing. It not only helps the privately insured, but also the government deficit. Win-win… for everyone except the pharmaceutical companies.
But wait, there might be an interesting twist that we haven’t discussed yet. Going back to AbbVie, only around 58% of its customers are in the US. Did you know that the US buyers often pay 2 or 3 times more than the rest of the world for patented pharmaceuticals? That’s right, foreign healthcare systems which are more socialist in nature negotiate more favorable pricing. The US healthcare system is more fragmented, weakening bargaining power. That enables companies to “subsidize” foreign discounts using US customers. President Trump has been acutely focused on this very issue, threatening action for some time.
Today, that came full circle when the White House announced a deal with Pfizer. Pfizer agreed to slash prices on many of its drugs, offering discounts of up to 85% through a new government site being dubbed TrumpRX.gov. Medicaid will get “most-favored-nation” pricing, meaning US taxpayers won’t pay more than other developed countries for Pfizer’s medicines. In exchange, Pfizer gets a 3-year reprieve from new import tariffs and promises $70 billion in U.S. investment. The idea here, though it’s still pretty complicated, is to force some sort of price parity between the US and the rest of the world. Plainly put, Pfizer and others that will follow are being pressured (using sanctions as a stick) to give US customers similar terms, and the only way to make that happen is to raise prices for foreign buyers. That is, if those US companies want to maintain their healthy margins.
Assuming that they do want to maintain them–understandable because… well, capitalism, companies like Pfizer will do exactly that. It can be a win for consumers, a win for big pharma, and a win for public and private US insurers. The rest of the world will end up the losers in this scenario. But there is a reality to be reckoned with here. This is economics at work; I brought up price parity before. In economics, price parity means charging the same price for the same good across different markets, after adjusting for currency. US drug prices are usually higher because there’s no single buyer to negotiate, while abroad governments act as monopsonies (another fancy economic term) and force lower prices. If the U.S. tied its prices to those foreign benchmarks, it would remove this imbalance and push toward global parity.
EQUILIBRIUM!! It should happen on its own, but sometimes it needs to be pushed a little. Today’s deal with Pfizer was not a win for the President as much as it was for free market economics. That said, President Trump does deserve credit for getting the ball moving. Folks, this is a complex problem, and today’s announcement is not the end solution, but it represents progress.
YESTERDAY’S MARKETS
Stocks bounced around throughout the session but managed a positive close which was helped along by Pfizer's deal with the administration. JOLTS came in stronger than expected and consumer confidence waned more than estimates. The dollar slipped as the Government barreled toward a shutdown.
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