You Can Blame Pharmacy Benefit Managers for Higher Drug Prices

Published by Real Clear Health

Pharmacy benefit managers (PBMs) administer prescription drug plans on behalf of insurers and employers. In the process, they negotiate reimbursement terms with pharmacies and drug prices with drug manufacturers. While plan sponsors face the direct financial costs of the prescription plans being offered to its members or employees, PBMs act as middlemen in the process. This creates an environment for conflicts of interest that drives PBMs to work for their own self-interests and not the sponsors that hired them – all while pushing up higher drug prices for consumers.

PBMs cut deals with pharmacies, promising them access to the plan’s beneficiaries in return for reducing fees and reimbursement for what the pharmacies would normally earn for filing a prescription. This tactic, called spread pricing, adds extra profits for the PBMs in addition to what plan sponsors pay PBMs for plan management. The Prescription Drug Price Transparency Act (H.R. 1316) introduced earlier this month by Congressman Doug Collins (R-Ga.) attempts to deal with these opaque transactions.

In addition, PBMs establish a formulary by negotiating drug prices with manufacturers. These negotiations often promise increased volumes, but restrict competitive drugs from the formulary in return for deeper manufacturer discounts and rebates. The specific terms agreed upon are not known to the pharmacies that fill the prescriptions or plan sponsors. Instead of using competition to drive lower consumer prices, PBMs use exclusivity to line their pockets.

In recent years, manufacturing rebates paid to PBMs and the PBMs list prices of prescription have increased rapidly. Because of cost sharing requirements, higher list prices mean that consumers pay more, while PBMs keep the manufacturer rebates rather than passing savings on to consumers in the form of lower prices.

Effectively, these tactics represent a tacit form of price gouging employed by some PBMs.

The incentive for PBMs to profit is in direct conflict with their role in minimizing sponsor costs, ultimately leading to higher consumer prices.

There are many cases where generic drug prices are lower than plan deductibles. Because some plan beneficiaries do not know this and pharmacists are not permitted to disclose this information under their agreements with PBMs, consumers are paying more than they should under their plans. The practice is called clawbacks, and it’s just one of several ways that some PBMs are increasing drug costs for everyone.

The point of all of this is that PBMs do not really represent their sponsors, nor do they necessarily save you money from the pharmacist or the manufacturer. Most PBMs are virtually unregulated in an industry layered with regulatory oversight, and only look out for themselves.

The largest PBM experienced an increase in net income of 70 percent in just two years, while the Bureau of Economic Analysis shows that after-tax corporate profits by other U.S. businesses remained virtually unchanged. According to one estimate, PBMs fail to pass $120 billion back to consumers, and retain another $30 billion in additional out-of-pocket costs.

With allegations of market failures caused by asymmetric information, conflicts of interest, collusive pricing, price gouging, and establishing formularies that maximize profits, among many other dishonest tactics, it can only be concluded that PBMs are driving up prescription drug prices for consumers.

What can be done?

First, PBMs should be required to provide the formulary, information on deductions and other out-of-pocket costs, and any administrative burdens to consumers and employers before they sign up for a plan. Second, patients paying coinsurance and deductibles should pay the negotiated price and not the full price for drugs. Third, pharmacies should be allowed and encouraged to disclose when lower cost medications are available outside of patients’ drug plans. Fourth, when a cheaper generic drug is available to patients that pay cash instead of using insurance benefits, pharmacists should be allowed to tell patients. Fifth and finally, manufacturing rebates should be provided upfront to consumers in the form of discounts at the cash register. PBMs could be made subject to audits to make sure that this pass-thru of saving occurs.

The bottom line is this: Consumers and sponsors deserve pricing transparency to make better market decisions and to encourage competition. Unless legislative action is taken, anti-competitive risks will continue to grow and the result will mean much higher prices for consumers in the future.

Steve Pociask is president of the American Consumer Institute Center for Citizen Research, a 501c3 educational and research nonprofit institute that recently released a new Consumer Bulletin focusing on PBMs and pricing issue. For further information, visit www.theamericanconsumer.org.