Now that the new administration has taken over, a lot of attention surrounds what President Biden plans for the future of health care in America. One especially important issue to consumers is that of prescription drug prices, and what the new President can do to bring them down.
One way drug prices can be reduced involves the conduct of Pharmacy Benefit Managers (PBM’s). PBMs are large companies that manage prescription drug benefits on behalf of payers and insurance plan sponsors. PBMs are meant to make money from plan sponsors who hire them to run prescription insurance plans and manage costs, but they have found other ways to pocket additional profits.
These companies negotiate discounted prices with drug manufacturers and strong-arm pharmacies for generous reimbursements for themselves in order to maximize their profit. By doing this, PBMs play a large unseen role in determining the final prices that patients pay for medications and which medications are allowed in their insurance plans.
The problem is significant. Research has shown that PBMs are taking good advantage of this privilege to deny patients greater choice and affordability with their care. Avalere Health found in 2015 that different people paid wildly different prices for the same drug on the same day. Arbitrary inflated prices that PBMs choose to charge for prescriptions that vary depending on the payer is price discrimination and puts a large burden on patients in out-of-pocket costs.
The past administration made efforts in the last year to close loopholes that Pharmacy Benefit Managers (PBM’s) use to make backdoor arrangements with drug manufacturers. Specifically, Former President Trump issued an executive order to pass through manufacturing rebates to Medicare patients at the point of sale, rather than allowing PBMs to take the kickback. This order was the first step in bringing the tactics of PBMs to the forefront and ensuring kickbacks given to PBMs from manufacturers are passed through to consumers in the form of lower prices.
The current administration should implement this rule and pick up on these efforts to close information loopholes in the entire health care system that allow for these rebate schemes and prevent PBMs, the middlemen, from taking advantage of their market power due to a lack of transparency.
Most people are quick to assume that drug manufacturers stand the most to gain under the current system, but that is not the case. List prices, or prices manufacturers initially set for drugs, rose again by an average of 3.3 percent for 2021. However, net prices for drugs, which totals revenue drug makers earn after providing rebates and other discounts, declined by 2.2 percent this year.
If patient drug prices are soaring and drug manufacturers are not making off with the gains, then where does the money go? The truth is, a lot of the profit is going to PBMs, who control an estimated 71 percent of the volume of prescription drugs dispensed through retail pharmacies.
PBMs engage in deal-making with pharmacies and drug manufacturers behind closed doors. These are deals that are not made available knowledge to the government or consumers, but they are used to extract extra profit from these firms. PBMs do this with pharmacies by promising them access to the plan’s large subscriber base in exchange for cutting fees or adding reimbursements, a tactic known as spread pricing. Pharmacies are forced to agree with these deals or instead forfeit a significant slice of the market.
With manufacturers, PBMs establish formularies, or tiers of different drugs available on a plan. Using these formularies, these middlemen promise drug manufactures exclusivity in order to limit drug competition and guarantee higher sales for manufactures, in exchange for higher margins for the PBMs. This means that a generic drug on a patient plan may not be the lowest priced drug for patients, but the one with the highest profitability for PBMs.
By weaponizing a lack of transparency with both parties and inflating prices for patients, PBMs use their information advantage as leverage with other parties, and this allows them to extract the most profit from prescription sales. The lack of price and cost information between the various parties represents anticompetitive conduct that allows PBMs to improve their bottom line – all at the expense of others, particularly consumers.
To address these anticompetitive risks, PBMs should be required to provide the formulary, other information on patient out-of-pocket costs, and any administrative burdens to consumers before they sign up for a plan. In addition, President Biden should give the U.S. Department of Health and Human Services or a different government agency the power of federal oversight to require these middlemen to flow their manufacturing rebates back to consumers.
Closing PBM Loopholes should be a center piece to the effort of the new administration to rein in overall health costs for the American consumer and increase competition.