High Drug Prices: Are PBMs the Right Target?
Pharmacy benefit managers (PBMs) may be Congress’ next target for high prescription drug prices. There is evidence that PBMs may be passing too little of that savings on to customers. The traditional PBM business model creates perverse incentives for keeping prices down. Six PBMs now control 95% of the private market.
As congressional leaders set their 2023 policy agenda, one issue garnering strong interest from both Democrats and Republicans is high prescription drug prices—and particularly the role of pharmacy benefit managers (PBMs). Following last year’s passage of the Inflation Reduction Act, which, over the objections of pharmaceutical manufacturers, gave Medicare the ability to negotiate drug prices and cap insulin copayments, PBMs may be Congress’ next target.
Both Congress and the administration increasingly scrutinize PBMs over concerns about the lack of transparency around their negotiations with pharmaceutical companies. PBMs assert they produce savings for employers and consumers, but pharmaceutical representatives argue PBMs pocket those savings. In July 2022, the Federal Trade Commission (FTC) launched an investigation into the nation’s largest PBMs and the role of consolidation on rising prescription prices; The FTC required them to submit data regarding their business practices. Oversight efforts have bipartisan support—a key factor in moving legislation in a split Congress. News reports of “spread pricing,” where PBMs charge health plans and employers a higher price than what they paid pharmacies for the drug, and market consolidation have further increased attention on PBMs.
While PBMs often get blamed for rising drug prices, are they really the right target? Let’s explore the current evidence of PBM impact on drug prices and how transparency policies could help rein in prices.
The role of PBMs
PBMs contract with health plans to administer pharmacy benefits and often develop prescription drug formularies by acting as intermediaries between health plans and pharmaceutical manufacturers. For certain prescriptions, some PBMs receive rebates and discounts from pharmaceutical companies in exchange for formulary placement. Multiple studies, including from the Congressional Budget Office, found that rebate payments lower governmental costs and copays for plan enrollees. However, other evidence suggests these practices can raise prices for consumers. Regardless, the traditional PBM business model creates perverse incentives for keeping prices down: While PBMs negotiate rebates with drug manufacturers, their revenue is based on a percentage of the drug’s list price—potentially incentivizing them to prioritize higher cost drugs.
Additionally, a high level of PBM consolidation has given a handful of companies major market power: six PBMs now control 95% of the private market. In recent years, PBMs have also merged with health insurers, giving them even more influence over medications that patients can access. PBMs argue that this market share gives them leverage to negotiate effectively with pharmaceutical companies, to the benefit of employers and consumers.
PBMs assert they produce savings for employers and consumers, but there is evidence that PBMs may be passing too little of that savings on to customers. The Ohio Department of Medicaid found that CVS Caremark and Optum Rx pocketed the 8.8% difference between what they billed managed care plans and what they paid pharmacies. A Delaware state auditor report also found that the PBM Express Scripts overcharged the state employee prescription drug plan $24.5 million.
Other entities assert that PBMs saved them pharmaceutical dollars. For example, the School Employees Retirement System of Ohio’s (SERS) PBM contract guarantees 100% pass-throughs and full transparency, with all rebates applied to SERS members in the form of reduced premiums. While the SERS negotiated a favorable pass-through arrangement, most employers do not have the scale or market power to ensure a similar arrangement.
There is also mixed evidence about how much pharmaceutical revenue PBMs retain. A 2018 Memorial Sloan Kettering Cancer Center analysis found that PBMs retained less than 5% of total net revenues, which is lower than other entities in the pharmaceutical supply chain. Conversely, a study funded by PhRMA found that PBMs and other intermediaries retain a majority of net revenues.
Opaque negotiations between PBMs and drug manufacturers—alongside formulary changes—may raise prices and leave employers in the dark about their own pharmacy benefits. Ultimately, manufacturers are responsible for setting the list price of a drug, but lack of transparency over PBM practices creates suspicion. A USC Schaeffer study found a direct correlation between rebate increases and manufacturer price increases: a $1 increase in rebates corresponds with a $1.17 increase in drug list price.
What can employers do?
Some stakeholders suggest employers should simply change or end contracts with their PBM if they are dissatisfied with transparency or pass-throughs. However, employers often rely on third parties such as PBMs due to a lack of in-house resources necessary to navigate the complex health system. According to a recent CBO report, as a result of this perceived complexity “employers’ roles in designing provider networks for plans, negotiating prices, and processing claims are almost always outsourced to consultants or third-party administrators. Those entities do not realize the full gains from negotiating lower prices, so they have little incentive to do so.” Further, the highly concentrated market shifts the power dynamic between employers and PBMs: with fewer PBMs to choose from, even large employers may have little bargaining power in their contracts.
Innovators changing the system
Innovators in the pharmaceutical benefits space are trying to change this asymmetry. Mark Cuban’s Cost Plus Drug Company, for example, aims to lower drug prices by offering discounts directly to employers. Through its own PBM, EmsanaRx, the company will report all information back to employers and pass through rebates in exchange for a 1.5% fee for each claim. Although Emsana and other startups may be more transparent about their negotiations with drug manufacturers and pass through savings, BPC interviews indicate that employers worry that newer entries into the PBM market lack enough scale to negotiate discounts.
What’s the solution?
Given this mixed evidence and market consolidation, Congress should require PBMs to provide cost disclosures and report on negotiations with drug manufacturers and profits from spread pricing and pharmacy fees to plan sponsors. Additionally, PBMs should report annually to the FTC on spread pricing, pharmacy payments, changes to formulary tiers, and differences in reimbursements to different pharmacies. Using PBM data, policymakers and employers could better determine whether and by how much PBMs are impacting the cost of drugs and thus design evidence-based solutions.
Transparency requirements would also enable employers to be more exacting in their contractual relationships with PBMs. In theory, employers could negotiate fairer contracts with PBMs to mandate transparency, limit spread pricing, and require pass-throughs.
Bipartisan support already exists for PBM transparency. In 2022 (and again in 2023), Sens. Chuck Grassley (R-IA) and Maria Cantwell (D-WA) introduced the Pharmacy Benefit Manager Transparency Act of 2023 (S. 127), which would prohibit spread pricing, require full rebate pass-throughs, and require PBMs to file an annual report to HHS.
Ongoing investigations could inform more comprehensive transparency laws. In June 2022, members of the House Education and Labor Committee asked the GAO to investigate the impact PBM rebates and formularies have on commercial pharmaceutical drug spending.
PBM-focused policies have garnered bipartisan support in the fight against high and rising health care prices. Lawmakers on both sides of the political aisle have introduced legislation, planned hearings, and announced potential caucuses to target the so-called middlemen. While some believe these efforts are simply intended to shift the harsh spotlight away from pharmaceutical companies, additional transparency surrounding PBM practices could help illuminate their impact on patient spending at the pharmacy.
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