Rx Price Transparency Is Key to Lowering Health Care Costs
The Trump administration’s recent efforts to increase transparency in hospital pricing have expectedly been met with legal push-back from the hospitals themselves. But shadowy hospital pricing is just the tip of the opaque iceberg that is driving up the costs of health care in America. To inject more competition into the industry, Congress and the White House needs to shed light on the pharmacy benefit manager (PBM) middlemen who keep prescription drug prices high.
Pharmacy benefit managers (PBMs) act as brokers between insurers, plan sponsors, pharmacies, and drug companies. By negotiating which drugs are covered by insurance plans, and deciding how much insurance companies should pay for them, PBMs play a central role in determining the cost of prescription medication for almost 270 million Americans.
The problem with the PBM industry is that so many of their deals are shrouded in secrecy. Manufacturers pay PBMs rebates to list their drugs on a preferred formulary tier—meaning that consumers are more likely to buy them on their insurance plans. However, these rebates don’t translate into lower prices for consumers.
This incentivizes PBMs to compete for manufacturers rebates, rather than competing on prices at the pharmacy cash register. Without insight into how these rebates are negotiated, insurers and consumers have no way of knowing whether PBMs are prioritizing low prices for their insurance plans or profits for themselves.
However, the lack of transparency isn’t limited to deals with manufacturers. PBMs also profit from ‘spread pricing’ where they profit from the difference between what they reimburse pharmacies and what they collect from plan sponsors. This artificially drives up costs for consumers and taxpayers who fund the insurance plans.
Spread pricing drains billions of dollars from the health care system each year. An investigation by Bloomberg found that more than a quarter of Medicaid spending on the 90 best-selling generic prescription drugs went to PBM and pharmacy fees in 2017. A similar investigation in Ohio found that taxpayers were over-charged by $224 million through PBM spread pricing for Medicaid plans. In some instances, PBM inflate list prices in order to make insured consumer pay higher out-of-pocket costs and deductibles.
To make matters worse, there is little competition among the PBMs themselves. The three largest firms—CVS Caremark, OptumRx, and Express Scripts—control almost 80% of the market, while the largest 6 firms control more than 95% of the market. With limited competition, there is little pressure to break from the pack and offer consumers and insurers more clarity.
Recent efforts to add further transparency to the industry represent an important start, but do not go far enough. In 2018, bi-partisan federal bills were signed into law to prohibit ‘gag clauses’ that had often prevented pharmacists from informing consumers if their prescription would have been cheaper out-of-pocket. Similarly, in May, the federal government introduced new rules to limit the scope of spread pricing for Medicaid plans. Despite these initial steps to clean up the PBM industry, consumers and taxpayers continue to be gouged through opaque rebates and prolific spread pricing under private plans.
And the problem won’t cure itself with time. Approximately half of Americans take at least one prescription medication each month, and that number soars to 85% of Americans over the age of 60. As the American population gets proportionately older, Medicare and private insurers stand to waste billions more due to shady middlemen.
At a time when PBMs enjoy soaring profits, countless Americans struggle to afford the rising costs of prescription medication. Increasing transparency around rebates and spread pricing would inject some much-needed competition in the PBM industry and would give consumers real choice.
Oliver McPherson-Smith writes for the American Consumer Institute, a nonprofit educational and research organization. For more information about the Institute, visit www.TheAmericanConsumer.Org or follow us on Twitter @ConsumerPal.