Consumers Deserve More Transparency from High Drug Prices

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News Flash: Drug makers have increased prices only slightly faster than inflation. But, how could that be?

A new study by IQVIA Institute reports that drug makers charged on average 13% more for their products in 2018 than they did in 2014, after deducting all of the rebates they provided to pharmacy benefit managers (PBMs) – the go-between entities that administer prescription drug plans for more than 230 million Americans, like you. Over the same period, the Consumer Price Index for all items increased 9%. But the shocking news was that since 2014, the “invoice price” for these drugs rose 47%.

If PBM drug prices are soaring, but they are not paying as much for these drugs year-after-year, where does all of this money go? 

In theory, PBMs act on behalf of plan sponsors – often companies that offer their employees prescription drug benefits – to negotiate lower rates, oversee reimbursements, and manage the details of the insurance plan. Only PBMs have a complete understanding of the prices and costs flowing between the various players involved in prescription plans.

Because PBMs have access to better, more complete information about costs and prices than other parties, PBMs are well-positioned to leverage this information asymmetry into higher profits.

Plan sponsors pay PBMs to administer their prescription insurance plan and manage its costs. Meanwhile, PBMs negotiate agreements with pharmacies, giving them access to the plan’s beneficiaries in exchange for smaller reimbursements for filling a prescription.  This tactic, called “spread pricing,” allows PBMs to pocket the difference between the payments they collect from plan sponsors and the prices they pay pharmacies. Sponsors are typically unaware of the profits PBMs derive from these transactions.

PBMs also establish menus of drugs available on prescription plans – called formularies. By controlling which drugs get listed on the formulary and which are left off, PBMs receive deep discounts and rebates by promising manufacturers higher volumes of drug sales.

Manufacturers are often willing to grant even deeper rebates when PBMs agree to create formulary restrictions on competing drugs. These dealings deprive consumers of the benefits of price competition between drugs and generate discounts for PBMs that are rarely shared with the plan sponsor.

Consumers bear the burden of these behind-the-scenes dealings. For example, if a manufacturer pays a PBM to include a higher cost drug an insurance plan’s formulary, the sponsor’s costs increase, as will the PBMs profits. This conflict of interest puts the PBM’s incentive for higher profits at odds with the interests of the plan’s sponsor or its beneficiaries.

Another widespread practice among PBMs is to generate additional revenue through clawbacks. PBMs collect clawbacks when consumers pay more for drugs under their PBM plan than they would if they paid cash. Because beneficiaries are often unaware that lower-cost options exist and pharmacists are not permitted to disclose pricing information under their agreements with PBMs, patients pay more than the price of their prescriptions 23 percent of the time, with an average overpayment of $7.69 on those transactions.

It should be clear who PBMs represent. Researchers have estimated that PBMs capture $120 billion in rebates that are not shared with consumers and retain another $30 billion in additional out-of-pocket costs paid by consumers. In recent years, these revenues have led to surging profits.

PBMs’ massive profits are made possible by their lack of transparency with their clients. Plan sponsors and beneficiaries need to have access to detailed information about their PBM’s activities, including negotiated rates with pharmacies, formularies, out-of-pocket costs, and rebates from manufacturers.

The solution means better informing the public – giving consumers better information to make good market decisions, not government regulated pricing.

As the new legislative session begins, Congress should demand increased transparency, require flow-through of manufacturer rebates to lower consumer prices, prohibit clawbacks, and consider giving federal agencies expanded oversight responsibilities to monitor PBMs’ practices.

The bottom line is that PBMs use nontransparent pricing practices to pocket billions of dollars in profits at the expense of American consumers. Reining in the abuses of the PBM industry must be central to any effort to lower drug prices in the U.S.  

 Knowledge is power, and PBMs have been profiting from an unfair informational advantage for too long.

 Steve Pociask is president and CEO for the American Consumer Institute, a nonprofit educational and research organization. For more information about the Institute, visit www.TheAmericanConsumer.Org or follow us at Twitter @ConsumerPal.

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