I have written extensively about pharmacy benefit managers (PBMs). These are the drug middlemen who negotiate discounts with drugmakers and manage drug benefits for insurance companies and health plans. Many of my reports over the years were about drug benefits in Medicaid programs. States tended to carve out drug benefits and manage them rather than hire PBMs. In the process, the state would overpay drugstores for the medications Medicaid beneficiaries use. For example, whereas Walmart will fill a month’s supply of many generic medications for $4, most state Medicaid programs pay a dispensing fee of $10 or more on top of an ingredient cost of several dollars. In other words, Walmart’s cash price is $4 while Medicaid pays the pharmacy up the street $14 for the same prescription. This mostly occurs because pharmacists descended on state capitals and lobbied for protection from PBMs. Pharmacy lobbyists generally found sympathetic ears among state legislators. Basically, they were captured by special interest constituents.
In the intervening years since I wrote about carving out Medicaid drug benefits versus carving in benefits the industry changed. PBMs began to consolidate to the point where the top three now control about 85% of the drug market. When three firms dominate an industry to that degree their behavior can go from benevolent (i.e. competing for business) to malevolent, self-dealing behavior. The top three are also now owned by two insurance companies and CVS Health. In decades past insurance companies would hire PBMs to manage drug benefits, paying them a management fee or allowing them to keep a portion of drug company rebates as their management fees. PBMs would designs benefit plans, usually steering enrollees towards generic drugs and rewarding them for using preferred drugs. Cheap generic drugs often required no cost-sharing, while brand-name drugs may have high cost-sharing. As the power of PBMs grew and they were snatched up by insurers, the strategy began to change. Instead of offering free copays for generic drugs, enrollees are required to pay cost-sharing that literally covers the cost of the drugs. Implausibly, insurance companies began to profit from drug claims rather than lose money on them. As PBMs market power grew, they began to demand a cut of the business they were steering patients to. Industry critics claim this has led to higher prices, by demanding bigger and bigger rebates to command a cut of the list price. In addition, some PBMs began to steer patients to high priced drugs due to the higher rebates on expensive drugs. Indeed, an investigation by the Federal Trade Commission found the largest pharmacy-benefit managers hiked up drug prices.
The largest pharmacy-benefit managers hiked the prices of dozens of drugs dispensed through their own pharmacies, according to a new report by the Federal Trade Commission released on Tuesday.The markups helped the PBMs reap $7.3 billion from 2017 to 2022, the FTC found. The PBMs—owned by insurers Cigna, CVS Health and UnitedHealth Group—are supposed to help keep drug costs low for employers and other clients.
PBMs raised the price of Gleevec, a cancer drug, 40 to 50 times what they paid to acquire it. PBMs jacked up the price of multiple sclerosis drug Tecfidera by 15 to 20 times what they paid. Keep in mind the job of PBMs is supposedly to get the drugs as cheaply as possible, pass on the savings to their clients and take a management fee for their efforts. That’s not how it works anymore. Rather than pharmacy benefit managers, they’ve become pharmacy benefit profiteers.
The problem (as usual) isn’t that PBMs are inherently bad. The problem is that perverse incentives pervade the U.S. health care system. Incentives that boost competition in normal markets are absent in U.S. health care. What often happens is stakeholders adopt business practices that take advantage of these perverse incentives. For example, they consolidated into three huge firms. Then insurance companies (and CVS Health) bought the big three. Their new owners leveraged these investments to extract more money (i.e. boost profits), not save money for employee health plans and patients. A common refrain was, if PBMs, hospitals, physician practices, drugmakers, etc. consolidate it will boost efficiency. No thought was ever given to the fact that without competition, greater efficiency would not benefit patients. The reverse has happened.
Read more at WSJ: Largest Pharmacy-Benefit Managers Hiked Up Drug Prices, FTC Says