Want to Bring Down Drug Prices? Go After the Middleman

Published by The American Prospect

Ask any member of Congress what their constituents ask them about most and they’ll probably cite the high cost of prescription drugs. There’s enough anxiety about it to generate space for a bipartisan solution. But the battle over saving Obamacare has dominated Washington, leaving no room for considering improvements to the health system. Even the fixes now being discussed mostly fall under the heading of ameliorating individual market exchanges. Prescription drug costs are somehow seen as a separate issue from health care.

Where Congress won’t act, an angry public is stepping into the breach. An important set of lawsuits target one of the biggest causes of higher prices—the middlemen that game the pharmaceutical supply chain by extracting profits from practically every player. Eventually, that gouging gets passed down to consumers.

All of which shows why, if we’re truly going to overhaul the health-care system, we have to understand how it works.

The middlemen are known as pharmacy benefit managers. They administer prescription drug benefits for health plans, and claim they play an important role in reducing costs, by bargaining with manufacturers and pharmacists to secure the lowest rate.

If a customer asks their pharmacist for a generic drug, they will be told they will pay a price based on a negotiated rate between the pharmacy and the health plan. Often, paying for the medication without using insurance is cheaper. Megan Schultz, one of the plaintiffs in the class-action lawsuit, alleges that CVS charged her $165.68 for a generic drug that would have cost only $92 if she paid cash.

Why would CVS steer her to pay more? Because of PBMs, which supply secret contracts between health plans and pharmacies that bar pharmacists from informing customers about lower-priced options outside the networks. If the customer asks what a medication would cost in cash, pharmacists can tell them. Otherwise they’re under a gag order, and would be expelled from the PBM network if they preemptively help their customers out. And patients with prescription drug plans naturally assume that their insurance entitles them to lower, not higher, prices.

PBMs also require pharmacies to collect “co-pays” on some drugs that aren’t co-pays at all, but surcharges that mostly go directly to the PBM. The PBMs limit the profit that pharmacists can take out of that co-pay, and claw back the rest. Again, this is all done without the knowledge of the patient.

Interestingly, the lawsuits go after two large pharmacy chains, CVS and Walgreens, rather than the PBMs, which mandate these deals in “take it or leave it” contracts. PBMs have such high market share that failing to sign with one of the Big Three—CVS Caremark (both a PBM and a pharmacy), Express Scripts, and Optum Rx— which control about 75 percent of the market, locks pharmacies out of tens of millions of potential customers.

But the lawsuits argue that pharmacies, by controlling which drugs plan members can access, have a fiduciary duty to those individual patients under the Employee Retirement Income Security Act (ERISA). They say CVS and Walgreens are violating this by failing to inform customers about higher prices.

The situation is even more insidious because CVS is one of the nation’s largest PBMs and a pharmacy at the same time. For customers in its PBM network, CVS makes money on the higher co-pay two ways. And they honor other PBMs with the same courtesy. “CVS maximized their own profits, the profits of the PBMs, and profits to third parties at the expense” of customers, one lawsuit alleges.

PBMs also use their power to deny patients generics in favor of higher-cost brand-name drugs. The biggest tool a PBM has is the formulary, the list of drugs that its plan will cover for patients. According to The New York Times and ProPublica, at least a dozen drugs, including the attention-deficit disorder medication Adderall and pain-relief drug Voltaren, are being protected from generic competition by staying on PBM formularies, with explicit instructions to doctors and pharmacies to only prescribe the brand name.

The Times quoted a spokesman for insurer UnitedHealth, who maintained that the company negotiates discounts to dispense brand-name drugs at a lower cost to patients. However, if they have high-deductible plans, they have to bear the full list price—which doesn’t change—until they hit a limit stretching into the thousands of dollars. The UnitedHealth spokesman added that patients can get an exemption to use the generic, but again, this is knowledge patients have to seek out.

What the Times didn’t mention is that UnitedHealth owns OptumRx, one of the Big Three PBMs. And the continued dominance of Adderall and other drugs is all about deal-making between PBMs and drug manufacturers. The Times quotes a spokeswoman for the makers of Adderall explaining that the company offers competitive pricing through negotiations with PBMs. This keeps Adderall in network formularies. But critics have charged that the discounts usually stay with the PBM rather than being passed on to the health plan, making them indistinguishable from kickbacks. The drug companies effectively buy exclusivity at a pittance and artificially lengthen the patent timeline.

Sadly, Washington is not wrestling with any of this. Congressional Republicans want to offer more high-deductible plans to encourage patients to be “smart shoppers.” But studies show that consumers don’t seek out price information in health care, and even if they did, PBMs and their counterparts play games to limit price transparency. Donald Trump talks about speeding drugs to market to lower costs, but if the PBMs can prevent usage, faster approvals become irrelevant.

The Democrats’ Better Deal agenda on drug prices doesn’t offer much help either. It focuses far more on individual stories of outrage—like hedge funds buying rare drugs and jacking up the price—than the systemic problem of the corrupt pharmaceutical supply chain. The new “price gouging” enforcer it calls for, and compelling companies to justify excessive price increases, look only at the raw cost, not what patients might actually pay because of a high deductible or a shell game with clawbacks.

The Better Deal does endorse changing how Medicare distributes its drug benefits. Medicare currently has a negotiator for Part D plans—PBMs, which end up driving up the price for patients and the Medicare program overall by extracting rebates and forcing seniors to pay the higher list prices before reaching deductibles. Democrats want Medicare to negotiate with drug manufacturers directly. But back in 2009, the party promised the same thing as part of the Affordable Care Act and didn’t deliver, as a consequence of a deal with the pharmaceutical industry.

The real solution is to overhaul the drug supply chain entirely. The government could create one national formulary that focused relentlessly on cost and was transparent in pricing, not just for Medicare but for every American. Until then, shining a light on the awful practices of PBMs, and using every instrument at our disposal—antitrust laws, private litigation, and congressional action—to increase transparency and reverse incentives to jack prices could have a powerful effect.

We must root out the ubiquitous monopolies in health care, not only on prescription drugs but throughout the provider system. Even a single-payer program that has to deal with the artificial pricing and lack of competition in our health networks would fall far short of its goals. Breaking up the power structures that worsen the health-care system must be a top priority.

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