Is Reform Coming to Pharmacy Benefit Managers?

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A massive, yet often unnoticed, business practice contributing to exorbitant drug prices in the U.S. may slowly be moving toward reform, according to a recent announcement by the largest practitioner.

Pharmacy benefits managers (PBMs) lie at the heart of the prescription drug industry in the U.S., affecting more than 230 million Americans. PBMs act as middlemen in a series of opaque transactions between plan sponsors (typically companies that offer their employees prescription benefits), beneficiaries, pharmacies, and drug manufacturers.

The absence of government oversight and the lack of transparency have allowed PBMs to pocket enormous profits at the expense of their plans’ sponsors and beneficiaries.

One approach PBMs take is to encourage drug overpayments — also known as clawbacks — which occur when an insured patient’s copay exceeds the price the PBM paid for the drug. In other words, the consumer would be better off purchasing the drug outside of their insurance plan. PBMs deliberately try to prevent consumers from becoming aware of these overpayments by prohibiting pharmacists from disclosing pricing information to their customers. As a result, Americans are estimated to overpay on prescriptions by more than $2 billion every year.

PBMs also generate revenue through a technique called “spread pricing.” By offering pharmacies access to insurance plans’ members, PBMs negotiate lower drug prices. PBMs capture additional profit — often unbeknownst to the plan sponsor — from this gap between what the plan sponsor pays for prescriptions and the discounted rates PBMs pay pharmacies.

A third tactic PBMs use is to manipulate the lists of drugs — called formularies — available in an insurance plan. PBMs negotiate prices with manufacturers, sometimes promising them higher volumes of drug sales or the exclusion of competitors’ products from the formulary in return for lower prices. Essentially, PBMs limit price competition in return for deeper manufacturer discounts and rebates.

To make matters worse, the amount of rebates paid by manufacturers to PBMs is usually based on a percentage of a particular product’s list price, which provides a financial incentive for PBMs to include on formularies products with high list prices to boost rebates, even if no clinical rationale exists for preferring one drug over another. This translates to higher out-of-pocket costs for consumers.

Due to rebates and discounts negotiated by PBMs, the gap between manufacturers’ list prices and the revenues they actually collect has grown substantially in recent years — up from $74 billion in 2012 to $153 billion in 2017. Yet despite this surge in manufacturer rebates and record-breaking profits among PBMs, consumers aren’t seeing lower prices at the pharmacy counter. In fact, Americans are facing rising prescription copays and deductibles. By one estimate, nearly one in four prescriptions involve a patient’s copayment that exceeds the average reimbursement paid by an insurer.

There is cause for a little optimism, however. Last month, Express Scripts — which, along with CVS Health and OptumRx, controls about 72 percent of the PBM market — announced plans to offer some of its clients more transparency and accountability by forgoing any compensation other than fixed management fees and revenue tied to clinical outcomes. Though it remains to be seen exactly how these reforms will operate and how consumers will benefit, Express Scripts’ plan appears to be a step in the right direction.

No solution to America’s spiraling drug prices will be effective without first reforming the PBM industry. Other PBMs should follow Express Scripts’ example and alter their business practices on their own. If not, Congress should expand the oversight authority of federal agencies to monitor PBMs’ activities. Until relevant information about out-of-pocket costs, administrative burdens, and negotiated prices are disclosed — and until plan sponsors and consumers are empowered to make informed decisions — this problem isn’t going away.

Liam Sigaud works on economic policy and research for the American Consumer Institute, a nonprofit educational and research organization. For more information about the Institute, visit www.TheAmericanConsumer.Org.

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