There are few things Republicans and Democrats both agree on these days, especially in health care. One area of agreement is both parties hate pharmaceutical benefit managers (PBMs), reports Kaiser Family Foundation (KFF) Health News:
PBMs were conceived as a way to manage prescriptions and hold down costs. But these middlemen have become bipartisan punching bags, accused of sucking up profits at the expense of employers, governments, and patients.
And while healthcare debates still divide Democrats and Republicans in Washington, D.C., taking on PBMs has become a unifying cause in an era of widespread frustration over rising healthcare costs.
PBMs are essentially volume purchasers of drugs who manage drug benefits for insurers, Medicare, Medicaid, and health plans. PBMs negotiate deals with drug makers, wholesalers, and pharmacies. At least in theory, health plans benefit from the PBM’s buying power. PBMs began innocently enough to buy drugs in bulk at a discount and manage the drug plans for health insurers. Along the way something curious happened. PBMs began to consolidate and drugmakers reported that PBMs began to change their negotiation tactics from bargaining for the best price to instead demanding hefty rebates.
Rebates necessarily raise drug prices because higher prices are required to provide a rebate and still earn a profit. Furthermore, instead of negotiating with clients to receive management fees, PBMs began requiring a significant share (sometimes all) of the rebates they arranged. Also, let’s not forget that the best deal at the pharmacy are generic drugs, which do not pay rebates. Thus, PBMs began to favor high priced brand drugs over generics.
Over time the three biggest PBMs consolidated to the point they controlled more than 80% of the prescription drug market and their clients (health plans and health insurers) had little negotiation leverage to refuse. About 10 years ago drug companies began raising the alarm that PBMs – not drugmakers – were responsible for high drug prices by demanding big rebates. Two of the three biggest PBMs (OptumRx and Express Scripts) are owned by health insurers. This literally means health insurers often make money selling drugs to plan members – rather than lose money when a member fills a prescription. One of the big three PBMs (CVS Caremark) owns a large pharmacy chain and can capture much of the drug business it manages, often to the detriment of plan members.
PBMs can also collude with drugmakers in ways that raise prices at the expense of their clients they supposedly serve. When Humera, a blockbuster biologic drug (finally) lost patent protection and faced generic competition in 2023, most experts assumed the generic would take a huge share of the market. It did not happen because the maker of Humera offered PBMs huge rebates and threatened to withhold rebates on all other drugs if cost-sharing was not equal for both (expensive) Humera and cheaper copycat biosimilars. Rather than steer their clients’ members to the cheaper generic, PBMs took the big rebates instead. This had a huge effect on the market. There are 118 biologic drugs expected to lose patent protection over the next decade. About 90% of them do not have a biosimilar drug in development because potential competitors are not sure they can recoup their investments considering that happened with Humera.
PBMs are a prime example of how health care businesses can game the system and get ahead of regulators and lawmakers. When PBMs began to buy other PBMs and merged into larger PBMs, policymakers naively assumed the efficiency gains would be passed on to their health insurers and employer plans. Of course, this did not happen. Regulators also did not act when PBMs began to ask for large rebates rather than negotiate lower prices. Indeed, it wasn’t until recently that lawmakers and regulators raised the alarm that vertical integration of PBMs, insurers and chain pharmacies run the risk of further reducing competition. Some lawmakers have taken notice.
One area where states are passing measures to restrict the power of PBMs is Arkansas and Tennessee. Both states passed laws to ban joint ownership of PBMs and chain pharmacies, although the bans have not taken effect yet. A similar measure failed in Louisianan last year due to ominous text messages sent by CVS to plan members. More needs to be done, however. As long as PBMs have such concentrated market share and continue to demand large drug rebates, rather than low prices, their incentives will continue to be perverse.
Read more at:
KFF Health News: Republicans and Democrats Find a Unifying Target: Pharmacy Benefit Managers
Goodman Institute Health Blog: Are Drug Middlemen to Blame for High Drug Prices?
Goodman Institute Health Blog: FTC Claims PBMs Jacking Up Drugstore Prices
Wall Street Journal: PBMs and Drug Rebates Perpetuate the High Cost of Drugs