Congress is poised to crack down on the drug-industry middlemen responsible for inflating the price of medicines. Pending bipartisan legislation in the House and the Senate would rein in these “pharmacy benefit managers” and strengthen competition among health insurers. The big winners will be patients, who could save billions of dollars at the pharmacy.
PBMs act as brokers, negotiating with drug manufacturers on behalf of insurance companies. They decide which drugs each health plan covers, and at what price.
This decision-making power gives them considerable bargaining leverage, which they use to extract discounts from drug makers in exchange for steering patients towards one drug company’s product, rather than another’s — regardless of their therapeutic differences.
In theory, these negotiations ought to result in lower spending for patients. But it hasn’t worked out that way — because PBMs’ compensation is closely tied to the nominal “list” price of a given drug. Because PBMs take a cut of the drug’s total price, they have an incentive to steer patients towards more expensive drugs, even when cheaper ones are equally effective.
Meanwhile, the discrepancy between the list price of a drug and what insurers actually pay provides an excellent opportunity for insurance companies to bilk their customers at the pharmacy counter. They do so by basing coinsurance payments on the list price, rather than the discounted price.
For example, a PBM may negotiate the price of a drug listed at $400 down to $200. Say the insurance company the PBM is working for requires patients to pay 20% of the drug’s cost in coinsurance. The insurer then charges patients $80 out-of-pocket — 20% of the original price — instead of $40, or 20% of the discounted price. Patients don’t have a clue about the discounted price because those negotiations are conducted in secret. But insurers win by paying less and billing patients more.
Total PBM profits increased to $28 billion in 2019.
There’s little way for ordinary Americans to escape this racket. According to the American Medical Association, almost 70% of Americans with commercial health plans are insured through a company that is vertically integrated with a pharmacy benefit manager. This means both the insurer and PBM have an incentive to favor higher list prices for drugs, with no regard for the patients stuck with higher bills.
If an American wants to change providers to escape a particularly predatory pharmacy benefit manager, good luck. Just six PBM companies control 96% of the prescription medication market. Currently, it’s virtually impossible for smaller, independent PBMs to compete with the massive insurance-owned PBMs.
Congress must step in to rectify this anti-competitive situation. By ending the consolidation of the PBM market and allowing smaller PBMs to compete, Congress will be ensuring that prices come down and Americans will have more options for affordable and high-quality health care.
Shifting PBM compensation structure to remove the incentive to prefer expensive drugs will lower costs for patients, employers, and the government. Any discount secured by a PBM should be passed along to patients at the pharmacy.
Plenty is at stake if Congress fails to hold PBMs accountable. The cost of healthcare will continue to climb, and patients will get sicker. In some cases, they will forgo taking their medications as prescribed, adding billions of dollars in avoidable expenses.
Preserving the critical market features of our healthcare system and lowering costs for patients are not opposing goals. Increasing competition by breaking up and regulating PBMs will accomplish both.
Peter Pitts is a former associate commissioner of the Food and Drug Administration and President of the Center for Medicine in the Public Interest.
