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Dirty Politics and Regulatory Capture is Why Arkansas Wants to Increase Your Drug Costs

The opinions expressed by columnists are their own and do not necessarily represent the views of

The Arkansas legislature is debating how best to squeeze higher fees out of consumers and taxpayers. Granted, that’s not exactly how they describe it. Legislators propose to regulate drug plan middlemen. You’ve no doubt heard of middlemen; they’re an old boogeyman. In the days before big box stores, whenever retailers wanted to claim they were the cheapest they always claimed to have cut out the middlemen. In this case, the middlemen are accused of being too good at their jobs, negotiating prices too low and not paying small independent drugstores high enough fees. 

Arkansas Governor Hutchinson said he favors “a market-based solution” in which pharmacies, insurers and pharmacy benefit managers (PBMs) negotiate a mutually satisfactory agreement, without the state having to intervene. Speaking of market-based solutions: how does the market determine when one party to an agreement offers fees that are too low? The answer: When disinterested parties walk away from the deal. However, small, independent pharmacists don’t want to walk away from the Medicaid drug gravy train; they’re walking the halls of the state capitol hoping to strong arm legislators into helping them. Politics at its finest! 

Such is the state of affairs in Arkansas today. Arkansas is the latest battleground where the drugstore lobby is trying to mandate higher prices. At the same time, the dominant insurer, Arkansas Blue Cross Blue Shield, is under pressure to hold drug costs down for employers, consumers and the state Medicaid-subsidized health program Arkansas Works

This week the Arkansas legislature held a special session to address supposed problems with the reimbursement of small drugstores paid by insurance plans. Small independent pharmacies cannot expect to fill the volume of prescriptions that big chain drugstores do so they want fees higher than are typically paid to larger, pharmacy chains. It’s like forcing consumers and taxpayers to pay convenience store prices even when there’s a Walmart next door. 

Governor Hutchinson indicated he is willing to sign legislation granting the Arkansas Insurance Department the power to regulate drug plans and PBMs. That’s more like a threat than a path to hammering out an agreement unbiased by politics. It’s like saying, “do what my constituents in the drugstore lobby want or the state will make you do it.”

Americans increasingly get their prescription drugs through drug plans sponsored by their health plan. Insurers often hire PBMs to negotiate prices and reimburse pharmacies for their drugs. About 85 percent of the drugs consumers take are reimbursed by a drug plan. Calls for lawmakers to impose new regulations on drug plans and the firms that manage them have risen as health plans strive to negotiate lower drug prices.

Lobbyists for drug makers and smaller, independent pharmacies want more regulation of drug plans to give them a negotiating advantage. The rural, community pharmacy trade groups routinely lobby state legislatures and Congress to reduce the tools health plans, drug plans and PBMs use to negotiate effectively and hold prices in check. Proponents argue new regulations will boost transparency and reduce conflicts of interest. Although these regulations are claimed to protect consumers, the regulations are really designed to weaken health plans’ ability to negotiate lower prices with drug makers and pharmacies. What really benefits consumers is unfettered competition, which results in lower costs. 

Over the past few years some states have proposed regulating drug plans under the state boards of pharmacy. That is akin to letting the fox guard the henhouse because pharmacy boards are dominated by pharmacists. Indeed, the U.S. Federal Trade Commission argued this type of regulation undermines the bargaining power drug plans use to negotiate lower prices and lower dispensing fees with pharmacy networks. In some cases these laws even grant the state pharmacy board the right to demand sensitive information on drug plans’ business practices. This proprietary information could benefit pharmacy trade groups, who could use it in business negotiations to raise fees on health plans.

It should come as no surprise that politicians play a game of quid quo pro, “you wash my back; I’ll wash yours.” The drugstore lobby rolls into the state capitol bearing campaign gifts; but they expect something in return. Unfortunately, this appears to be the case in Arkansas, Ohio and Kentucky, the latest states trying to jack up drug prices.

Devon M. Herrick, PhD is a health economist and policy advisor at the Heartland Institute.

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