With revolutionary vaccines being developed in near record time, healthcare and the pharmaceutical industry have figured prominently in news coverage during the coronavirus pandemic. These life-saving vaccines have been offered at little or no cost to citizens. However, prior to the pandemic, the cost of prescription drugs for all maladies was a concern for many Americans. It is also likely to be a constant concern in the future.
According to polling data from the Kaiser Family Foundation, more than 80 percent of Americans describe the cost of prescription drugs as “unreasonable.” Further, another 31 percent say they actively have a difficult time affording their prescriptions, with 29 percent saying they’ve either foregone a prescription or skipped doses to avoid high costs. This is not an isolated problem, and one that could carry weighty consequences for all families.
A large part of the reason for these high prices is the perverse incentives the current system offers to pharmacy benefit managers (PBMs). These entities negotiate between drug companies and insurance companies. They also have a large say over which drugs end up on formularies. Thus, they play an outsized role in the pharmaceutical ecosystem.
Insurance companies reimburse PBMs based on how much of a discount they can negotiate with the drug companies. While this structure is supposed to incentivize PBMs to find discounts and drive down prices, in actuality it does the opposite. Because they are paid based on the difference between the list price and the negotiated price, PBMs are better served if they focus on drugs with incredibly high list prices. That way, they can more easily secure a bigger “discount” and get paid more by insurers.
Given that drug companies know how much influence PBMs have over coverage decisions and formularies, they are thus incentivized to raise their prices to make themselves more attractive to the PBM. For example, A PBM would much rather choose a $500 drug that can be negotiated down to $300 than a $50 drug that can be negotiated down to $30. Even though the latter drug is ten times more affordable, PBMs would miss out on a big reimbursement from insurers.
Besides driving drug prices higher, this scheme leaves patients behind in another way. Many insurance plans require patients to pay for medications at the full list price until hitting a deductible, or a percentage of the list price until a certain point. Those discounts that the PBMs negotiate are often not passed to consumers, nor are PBMs required to disclose how those negotiations proceeded. In short, the cards are stacked against patients in almost every way.
This lack of transparency is one of the fatal flaws of the system and provides patients with little recourse. However, businessman, TV personality, and Dallas Mavericks owner Mark Cuban is seeking to expose that system and create a better way. Last week, Mark Cuban launched the Mark Cuban Cost Plus Drug Company (MCCPD) as an online pharmacy. This PBM operation offers low-cost generic medications to patients and emphasizes transparency.
MCCPD is transparent about how much it costs to manufacture, distribute, and market its products. Their stated mission is to ensure there are no hidden costs or anything that goes on behind closed doors that is not equally offered to patients.
This transparency is key to lasting solutions for drug pricing and availability. Patients deserve to know if the medications they are taking are being offered to them because they are the best available or because they offered the sweetest deal to a PBM. The “savings” attained by PBMs behind closed doors ought to be passed on to patients, rather than making them pay the fictionally high list price.
Market-based and transparent solutions like Cuban’s PBM are the first step towards addressing the problems with traditional PBMs. MCCPD is still a small operation, which will not overhaul the entire system… yet. Lawmakers should look towards his example to bring about lasting change. Unfortunately, many in Congress are bogged down with unserious solutions that involve restrictive price controls on medications, which will only serve to reduce supply, investment in research and development, and delay access to care. Even worse, the Biden administration is set to delay the implementation of a Department of Health and Human Services (HHS) rule that would guarantee some degree of transparency for PBMs.
The market has identified a core issue with the drug pricing system. Leaders in Congress need to let transparency and market forces drive any legislative solution. Entrepreneurs like Mark Cuban are also integral in providing alternatives to the warped incentive structure we see today and lawmakers also must ensure that the regulatory framework is such that people like him can continue to do so. This is the way forward.
Dan Savickas is the Government Affairs manager at Taxpayers Protection Alliance.