Cherry Coke is sweet, but cherry picking a comparator to maximize the contrast effect can leave a sour taste in one’s mouth. A recent Wall Street Journal video attempted to explain how drug prices work and, in doing so, compared drugs to soda — but this comparison is as distasteful as a warm, flat soda.
Soda
The WSJ video says, “Here’s the supply chain for a beverage you might buy at the drugstore, say, a Pepsi. PepsiCo manufacturers the soda and sends it to a retailer, who sells it to a customer. The customer pays the retailer, and the retailer pays PepsiCo. Simple, right?”
Well, no, it’s actually not that simple.
Companies that make soda (or “pop,” if you live almost anywhere between Buffalo and Seattle across the northern U.S.) manufacture syrup and sell the syrup to bottling companies — often, independent franchisees — that add water and carbonation, then distribute the product. PepsiCo and Coca-Cola also sell syrup to restaurants and other establishments that sell fountain beverages.
Bottled soda is distributed through three channels. The first channel — and the only one described in the WSJ video — is “direct store delivery,” in which the bottling company sends the product directly to retailers and places the items on the shelves. The second channel is known as “broker warehouse distribution,” in which the bottling company moves the product from its warehouses to retail warehouses, often through a third-party distributor. The third channel is referred to as “vending and food service sales,” in which the bottler sells the product to third-party food service and vending distributors, which then resell the product to restaurants and other establishments.
Cherry picking a relatively simple beverage like soda is like a clever debate tactic. Imagine how much less effective the WSJ video would have been if all three distribution channels were described, or a more complicated beverage like milk were picked!
Milk
It is said that only five people understand how milk is priced in the United States — and that two of them are dead and two are lying. In a limited amount of space, let’s try to shed some light on the structures, processes and relationships that make milk pricing complicated.
Producers (farmers) sell their milk to processors. Processors then turn the raw milk into various classes of products: the milk we buy and drink (the Class I product); soft dairy products like ice cream and yogurt (Class II); hard cheeses (Class III), and butter and dry products (Class IV). Processors track the products they make and report these stats to the U.S. Department of Agriculture. The USDA determines how much milk went into each of the different product classes, then uses a formula that accounts for the cost of making products in each class to create a weighted blend price. This is the minimum price processors must pay producers for their milk. Class I milk is worth more than Class IV products like butter, because butter has a longer shelf life.
Adding a bit more complexity to this, there are 10 Federal Milk Marketing Orders (FMMOs) in the United States, each covering a different region. To account for regional cost differences (e.g., the cost of processing), each FMMO sets its own values for the variables in the USDA pricing formula. As a result, the blend price can be different in each FMMO.
When a processor pays a farmer, it actually pays into a producer-settlement fund. It does not pay the blend price; rather, it pays into the pool based on the value of the products it has processed according to the USDA’s formula. If the amount owed to the producer is more than the blend price, the producer is paid the blend price and the excess remains in the pool. If the amount owed is less than the blend price, then the pool covers the difference so that the farmer is made whole.
Still following? Now consider this: State governments sometimes layer their own milk-pricing systems on top of the federal system. And Congress will occasionally pass legislation to affect milk pricing rather than let the USDA handle it. The sum of all this is that if the WSJ video chose milk instead of soda as the comparator, then drug pricing might look, by contrast, relatively simple.
Drugs
If the WSJ thinks this video is objective reporting, then it’s time to burst that bubble. The comparison of soda to drugs is not the only example of bias in this piece — there are at least seven more.
First, WSJ’s passing mention of drug wholesalers but its failure to mention that intermediaries are often involved with the distribution of soda is not balanced. Second, by focusing on how PBMs negotiate rebates with manufacturers but ignoring an array of transactional and transformational roles PBMs play, WSJ perpetuates the functional opacity of PBMs and helps to foster an appearance of impropriety. Third, describing PBMs as the link that “adds a lot of complexity to the chain” is a matter of opinion. Fourth, referring to PBMs as middlemen overlooks the fact that PBMs were created by and serve payers, and are not some imposing intermediary. Fifth, sticking a baseball hat labeled “MIDDLEMAN” on the cartoon character meant to represent a PBM does not add informational value — it only fans the flames. Sixth, WSJ’s description of the portion of the rebate PBMs keep as the amount “they pocket” — an amount that, in fact, is proportionally very small — is charged language that fuels perceptions that this is unethical or fraudulent behavior.
Seventh, after presenting an oversimplified, 60-second review of formularies, tiers, copays, and rebates and their relationships to sales, the narrator says, “If this seems confusing, that’s because it is.” In saying its narrative is confusing, the WSJ is confusing objective truth and subjective truth. Every structure, process and relationship can be described in simple or complex terms. The quantum mechanics underlying soda losing its fizz are complicated, yet we can simply say that the CO2 molecules forced into the syrupy liquid under pressure escape as gas bubbles when the can or bottle is opened and the pressure is released. Similarly, we can describe drug pricing in relatively simple terms, or we can get into more technical aspects, such as performance guarantees or value-based contract metrics, to name just a couple. If these more technical and complicated aspects were included in WSJ’s narrative, then some laypeople may have indeed been confused.
When debating options to improve drug pricing, let’s help ensure that the comparators are fair and described accurately. (The “Pepsi Challenge” in the ’70s seemed fair because participants were blindfolded while tasting Pepsi and Coke.) And to have an honest debate, as best we can, let’s leave our biases at the door. Whereas the bubbles in an opened soda are fleeting, the intractable nature of drug pricing in the United States is most likely enduring.
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