Merck CEO Kenneth Frazier thinks something has to change within the pharmaceutical industry to fix the issue of drug pricing.

"I don't understand where we live in a world where 50% of the value goes to the supply chain," Frazier said at an event at the Economic Club of New York last week.

Frazier said he expects to see disintermediation — or reducing the number of companies between a product and a consumer — start to happen in the pharmaceutical industry, in the way it's happened with cable.

As Kenneth Frazier sees it, something has to give.

During an hour-long, wide-ranging interview with the Economic Club of New York, Frazier, the CEO of New Jersey-based pharma giant Merck, addressed the issue of rising prescription drug costs and how it's impacting patients.

The way he sees it, Merck publishes the list prices the company sets for a particular drug. The list price is the amount a drugmaker sets, and it's often the most publicly available number. But after that's set, there are often discounts the drugmaker pays out to middlemen, which may or may not make their way directly to patients. Those discounts vary and are kept secret. And if you have a high deductible plan, you might still be on the hook for paying the full list price, even if you don't get the direct benefit of the discounts.

For example, Merck has published reports outlining the company's average list and net price increases for its products. Merck's average net prices after factoring in those discounts decreased by 1.9% in 2017 as list prices increased 6.6%.

"I don't understand where we live in a world where 50% of the value goes to the supply chain," Frazier said.

Frazier said he expects to see disintermediation — or reducing the number of companies between a product and a consumer — start to happen in the pharmaceutical industry, in the way it's happened with cable. Before Disney owned its own media networks, it had to pay to get its content in front of viewers. Now, it owns media networks like ABC and ESPN, which it can use to show its content, making it one less step to get to viewers.

The same could happen in the pharmaceutical industry. Already, mergers are taking place that combine insurers with pharmacy benefit managers, the middlemen responsible for negotiating discounts to the list price of medications on behalf of health plans and insurers. And the Trump administration has been putting pressure on the PBMs and the rebates they receive from drugmakers. Whether those changes lead to less drug pricing pressure remains to be seen.

"I know how hard it is to make my 50 cents on the dollar," Frazier said. "I think that system's got to change."

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