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David Balto

David Balto

Pharmaceutical costs are appropriately an important concern for Congress, and a floor vote on Speaker Nancy Pelosi’s health care plan is soon expected. But her bill misses out on a major opportunity to hold drug middlemen accountable — primarily pharmacy benefit managers.

PBMs are glad not to be in the spotlight. In fact, in an earnings call this month, executives at CVS Health said the debate has shifted away from them, and they’ve been able to take advantage of that. But any reform efforts that ignore the PBMs’ role in driving up drugs costs will mean middlemen will continue to inflate the cost of drugs and limit choice at the expense of patients.

The drug pricing debate used to focus only on manufacturers. That myopic approach meant that stakeholders failed to recognize how middlemen were raising system costs and preventing consumers from receiving the drugs they need. And that is a spotlight that is long overdue. In 2016, PBMs’ net revenue was $22.4 billion, nearly double their net revenue in 2012, a tremendous loss in potential savings for consumers.

The PBM market is clearly broken. There are three things a market needs for competition to thrive — choice, transparency and a lack of conflicts of interest. And on all three accounts PBMs receive a failing grade.

The PBM market is highly concentrated. Three major PBMs — Express Scripts, CVS Caremark and Optum — control 76 percent of the market. As the White House Council of Economic Advisers reported, the concentration of market share among these three companies “allows them to exercise undue market power against manufacturers and against the health plans and beneficiaries they are supposed to be representing, thus generating outsized profits for themselves.”

That report noted that the profits taken by the pharmaceutical middlemen account for 20 percent of prescription drug spending. (That seems unfathomable compared to other markets in which distribution costs are less than 5 percent.)

There is clearly inadequate transparency — countless government entities, unions and employers complain that they are denied the basic information to determine if they are given a fair deal. And the PBMs are no friend of consumer transparency. Until Congress acted last year, PBMs prevented pharmacists from telling consumers when a lower cost drug was available. You don’t need a doctorate in economics to realize that means the PBMs are interested in consumers paying more, not less.

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And finally, there are clear conflicts of interest. PBMs make their money, in part, by negotiating rebates and percentage of list price-based fees with drug manufacturers and, in many cases, keep a chunk of those rebates and fees for themselves. PBMs have the dominant negotiating position for rebates because failure to reach agreement means the drug manufacturer’s product is left off the formulary (i.e., the list of treatments to be covered by the plan). Therefore, drugs are not necessarily placed on formularies based upon their safety and efficacy, but rather on how much income the PBM can generate for itself from the rebate. That also means that the PBM has a propensity to direct patients to higher-priced drugs for more rebate revenue or to PBM-owned pharmacies.

Consumers are losing and paying a stiff bill for these conflicts and the PBM rebate game. Rebates, discounts and other price concessions from biopharmaceutical manufacturers more than doubled in a six-year period — from $74 billion in 2012 to $166 billion in 2018 — but co-pays, coinsurance and deductibles continued to rise anyway. PBMs also charge their payer customers a higher price for drugs than the price they pay the retail pharmacies for dispensing them — a concept known as spread pricing that boosts PBM bottom lines. And patients pay the price for this at the pharmacy counter.

As the administration demonstrated (in its proposal to eliminate the anti-kickback safe harbor) the current rebate system creates perverse incentives leading PBMs to favor more expensive drugs and deny access to new therapies that would cost less and lead to better healthcare. And PBMs increasingly demand higher prices to secure higher rebates. How does this make sense?

The scorecard is clear — the broken biopharmaceutical supply chain leads to skyrocketing PBM profits and higher out-of-pocket costs for consumers. This is a lose-lose situation for consumers. And ignoring PBMs in any reform efforts means that consumers will continue to suffer egregious harm.

There is a solution here similar to what the administration considered in the anti-kickback safe harbor proposal: As a first step, Congress should ensure that middlemen are only able to receive and retain revenue that is not linked to a drug’s price. Congress should also pass legislation that requires that all manufacturer discounts and rebates result in direct savings to consumers at the pharmacy counter. These middlemen schemes result in higher drug prices and less choice.

Middlemen should not be able to pocket consumer rebates because the market is broken and complex. The purpose of rebates on a given medicine are to benefit consumers utilizing that medicine — and that’s whose pockets rebates should go to.

David Balto is a former policy director at the Federal Trade Commission and a leading advocate for pharmacy benefit managers reform. He wrote this for InsideSources.com. The opinions are the writer's.

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