Editor's Note: This column is co-authored by Ryan Ellis and Nicholas Johns.
Of late, Pharmacy Benefit Managers (PBMs) have come under fire from nearly all corners of Congress. More than fifteen legislative proposals have been filed on changing the way PBMs operate, while six committees in Congress have convened hearings on the topic. Will all this attention lead to a good outcome for patients and taxpayers, many of whom have never even heard of the term “PBM”? It’s possible, but only if Congress takes care to enact free market reforms that boost visibility on PBMs’ pricing practices, rather than tipping the scales in favor of heavy-handed government regulators.
PBMs are companies that act as intermediaries between drug manufacturers, health insurers, and pharmacies. They are supposed to help lower drug costs and improve access to medications for consumers through negotiations, but lately their business models have been the subject of confusion and questioning. PBMs can sometimes influence drug prices, availability, and quality without transparency. The PBM industry itself is already estimated to be around $500 billion annually - money which comes from consumers, taxpayers, manufacturers, pharmacists and other health care stakeholders. It’s important to ensure that everyone has the transparency tools they need to weigh whether the benefits PBMs deliver are worth that cost.
PBMs provide various services to health insurers, such as processing claims, developing formularies, negotiating discounts and rebates, and managing pharmacy networks. They also create and maintain prescription drug lists, called formularies, that determine which drugs are covered by a health plan and how much consumers have to pay out of pocket.
PBMs claim that they save money for health insurers and consumers by negotiating lower prices with drug manufacturers (“rebates”) and passing on the savings. However, the true value of the rebates and how much of these savings are passed through to end-users has come under scrutiny. In fact, PBMs often benefit from higher drug prices, because they receive rebates from drug manufacturers based on the list or “sticker” price of the drugs. They also can earn money from “spread pricing,” which is charging a plan sponsor more for a drug than a PBM reimburses a pharmacy for the same drug while pocketing the difference. These rebates and spread pricing practices are not disclosed to the public or the health insurers, and PBMs can keep a large portion of them as profit.
PBMs also have the power to decide which drugs are preferred or excluded from the formularies, which can affect the availability and affordability of medications for consumers. For example, PBMs can exclude drugs that have lower prices or higher clinical value in favor of drugs that offer higher rebates or discounts. This can limit the choices and options for consumers and providers, and force them to switch to less effective or more expensive drugs.
PBMs not only affect the private sector, but also the public sector. PBMs manage prescription drug benefits for various government programs, such as Medicare Part D, Medicaid, and the Veterans Health Administration. These programs account for about 40 percent of total prescription drug spending in the U.S., which means that taxpayers are directly affected by PBMs’ practices.
According to National Taxpayers Union Foundation’s research, PBMs have increased drug costs and reduced access to medications for Medicare Part D beneficiaries by using various tactics. One major issue is steering patients to their own mail-order or specialty pharmacies, even if other options might provide better care for individuals. Additionally, they can exclude certain drugs from the formularies or place them on higher tiers, which can increase out-of-pocket costs for patients and reduce adherence.
NTUF estimates that these practices have cost taxpayers $43 billion over 10 years in Medicare Part D alone. Moreover, PBMs have contributed to higher drug prices and spending in other government programs, such as Medicaid and the Veterans Health Administration.
With the federal government’s financial picture so bleak, especially in its health care system, every part of that system ought to be geared toward delivering the best care at the most sustainable level. And, given the significant impact of PBMs on drug prices and spending, it is imperative that they are held accountable and made more transparent. However, PBMs operate in an opaque market, where they can hide their business practices and financial arrangements from the public and their clients. Shining a light on these practices can help plan sponsors, especially government actors, determine how best to direct their business and create better information to make more informed and competitive decisions on their drug spending.
There is an urgent need for more transparency requirements for PBMs at both the federal and state levels. Some of the possible measures include increasing transparency on spread pricing for government plans, additional reporting on the use of specialty pharmacies in Medicare and Medicaid, and exploring new payment models.
Thoughtful PBM reforms can benefit patients and taxpayers. Reliable, accessible information that will make PBMs more accountable and transparent is the tool policymakers need to begin the job. Otherwise, the pressure to address these issues will result in harmful policy approaches like further empowering an out-of-control Federal Trade Commission with a hammer to go after PBMs on antitrust grounds. Additionally, Congress should avoid banning spread pricing entirely and interfering substantially with private sector negotiations with the imposition of government price controls. These measures intrude on the private right to contract and would likely only lead to the cost bubble being shifted around elsewhere. A tailored approach will lead to a more competitive and transparent PBM market for all stakeholders, while avoiding harmful and excessive government intervention.
Ryan Ellis is the President of the Center for a Free Economy. He is an IRS Enrolled Agent, which makes him a Treasury Department-regulated tax expert.
Nicholas Johns is a policy and government affairs manager with the National Taxpayers Union, a nonprofit dedicated to advocating for sound tax and fiscal policy at all levels of government.