Pharmacy benefit managers add cost to healthcare, impose consumer and market burdens, study says

DATE: May 15, 2017

Healthcare Finance

Due to inefficiencies in the current regulatory framework, pharmacy benefit managers can add cost to the healthcare system and impose burdens on both consumers and market competition, according to a new study released by the Pacific Research Institute.

PBMs — essentially middlemen who process prescription transactions, negotiate drug discounts and manage the drug formularies for health plans — exacerbate problems with adverse market incentives, which are baked into the current system, the report said.

Because of current regulations, PBMs create uncertainty by incentivizing higher list prices for medicines that enable large rebates and discounts, which are especially valuable for PBMs. And since co-pays generally depend on list prices, the large discrepancy between list prices and transaction prices causes higher patient co-pays than are necessary. For PBMs, market complexity created by this opaque pricing structure makes it easier for them earn higher profits.

For Medicare Part D patients, the higher list prices and co-pays can push patients into the coverage gap faster, the report found. In 2017, the coverage gap is $3,700 of spending on covered drugs. That means once a patient breaches this gap they’re responsible for all of their drug expenditures until they reach the out-of-pocket spending limit, which is currently $4,950. PRI said a more transparent pricing structure would reduce those costs and save patients money.

Pharmacies can often be negatively impacted as well, PRI found. Pricing volatility and fees that PBMs impose can be especially burdensome on long-term care pharmacies; the higher costs and revenue volatility cause those pharmacies to lose money in more than 60 percent of the generic medicine they sell.

Smaller pharmacies are perhaps hurt the most. Evaluating PBM contracts is enormously difficult even for large purchasers and the federal government, and PRI found these difficulties manifest in the forms of higher costs and reduced quality.

This lack of pricing transparency enables PBMs to boost their share of revenues related to manufacturers and pharmacies, according to the report. That’s due in large part to payments and discounts along the supply chain, as well as retrospective rebates. The retrospective fees, such as direct and indirect remuneration fees, are particularly problematic as they “claw back” revenues from pharmacies based on sales that were made months earlier. So unlike a normal transaction, many pharmacies won’t know how much they earned from the sale of a drug until long after the transaction is a done deal.

On top of that, PBMs can also exert influence on the medicines a patient can access through their control of the drug formularies.

PRI said the best way to address these problems is to create greater transparency, and simplify the pricing structure to encourage more competition. Some current proposals seek to do this, such as the Creating Transparency to Have Drug Rebates Unlocked Act. If it because law, it would require the Centers for Medicare and Medicaid Services to post the rebates that PBMs receive, and the proportion of those rebates that go to Medicare Part D beneficiaries.

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