Congress: Why Don’t Consumers Benefit from Drug Rebates?

When you pick up a prescription at the drugstore you don’t always pay cash, you often pay an insurance copay. Occasionally if you’re picking up a generic drug it may be free with no cost sharing, although that is far less common than it once was. My wife and I use a program called GoodRx. One time I went to CVS to pick up my dog’s medication and the pharmacy tech informed me that CVS had a special program for veterinary medications. The discounted price would be $54 as I recall. I pulled out a GoodRx coupon and asked if the coupon was good. He said it was. My new price was around $15. How is that possible? Keep reading and I will explain.

Regardless of where you buy your prescription drugs there is a good chance that a drug middleman is part of the transaction. Drug middlemen are what’s known as PBMs. PBM stands for Pharmacy Benefit Manager. PBMs are large drug purchasing organizations that manage drug benefits for employers and insurers. PBMs help employers, insurers and consumers all band together into larger groups with far more purchasing power than individuals or even employers would have on their own. Employers, insurers and consumers get lower prices than if dealing with drugstores individually.

In the anecdote about my dog’s medication, GoodRx works with several large PBMs to get cash-paying consumers lower drug prices. Absent the PBM working for GoodRx, I would have had no choice but to pay $54 for Clementine’s meds rather than $15. So, what’s the problem? Consumers aren’t always the ones who benefit from cheap drug prices when they have insurance. Sometimes the PBM or the health plan keeps the discount, forcing members to pay the higher price when they fill a prescription.

When PBMs work for health plans they can either charge a management fee or keep a portion of the savings as their fee. Often the savings is in the form of a rebate off manufacturers list price. Research has found that something like 90% of the rebates flow back to the client, which is usually a health plan. A health plan can use the rebates to lower insurance premiums, lower drug copays or boost profits. Too often it’s the latter.

In recent years PBMs have acquired something of a bad reputation. Small pharmacies hate them because PBMs cut into pharmacy profits. Drug makers hate them because PBMs reduce drug company profits. Drug makers even claim that PBMs are to blame for high drug prices. That’s sounds disingenuous considering drug makers set high drug prices. However, it is becoming increasingly clear that drug makers may have a point. According to Kaiser Health News:

Drug manufacturers claim that exorbitant PBM demands for rebates force them to set high list prices to earn a profit. Independent pharmacists say PBMs are driving them out of business. Physicians blame them for unpredictable, clinically invalid prescribing decisions. And patients complain that PBMs’ choices drain their pocketbooks.

In recent years the gap between net price and gross price has been rising. That’s another way of saying drug rebates are getting larger. When rebates are large consumers with health insurance often pay the higher list prices while the middlemen, or the health plan, benefits from the rebate. It wasn’t always this way. The problem is consolidation within the PBM industry. This according to Kaiser Health News:

The three biggest PBMs — OptumRx, CVS Caremark, and Express Scripts — control about 80% of prescription drug sales in America and are the most profitable parts of the health conglomerates in which they’re nestled. CVS Health, the fourth-largest U.S. corporation by revenue on Fortune’s list, owns CVS Caremark and the insurer Aetna; UnitedHealth Group, a close fifth, owns Optum; and Cigna, ranking 12th, owns Express Scripts. While serving as middlemen among drugmakers, insurers, and pharmacies, the three corporations also own the highest-grossing specialty drug and mail-order pharmacies.

Critics argue that the difference between net price and the higher list price should benefit consumers. Plan members filling a prescription may pay $20 for a generic drug that actually cost their health plan $5. The difference is called spread pricing. PBMs with strong market power can use spread pricing to enhance their profits. Or the profits can pass through and benefit insurers, some of whom own PBMs.

In other words, drug companies blame PBMs for high drug counter prices, PBMs blame insurers, and insurers blame the drug companies, all part of a health care system that hinges on an unspoken bargain…

The Federal Trade Commission and Justice Department allowed the largest PBMs to gobble up competitors and merge with insurers during the Bush and Obama administrations on the grounds that bolstering their powers might rein in prices. The FTC fought state investigations of anti-competitive behavior, saying that pressure on PBMs would benefit consumers.

What sounded good in theory hasn’t worked too well in practice. The reason is that the U.S. health care system is not competitive. Without competition, lowering costs in one area often just boosts profits in another area that has little competition.

The source article is worth reading. PBMs, the Brokers Who Control Drug Prices, Finally Get Washington’s Attention | KFF Health News