The last few months have seen a flurry of activity on Capitol Hill regarding prescription drug reform, with a particular focus on pharmacy benefit managers, or PBMs.
The U.S. Senate Finance Committee is set to markup a bipartisan PBM reform bill within the next few days.
The House Energy and Commerce Committee and the House Committee on Education and the Workforce are weighing PBM reform legislation of their own.
All these efforts have an eye on reducing drug costs for patients.
It's rare that lawmakers from both parties agree on health reform.
But in the case of PBMs, such agreement is more than justified.
These middlemen have profited for years by inflating the prices patients pay for prescription drugs while generating waste and inefficiency throughout the healthcare market.
Nearly 80% of Americans believe that pharmaceutical company profits are "a major contributing factor to prescription drug costs," according to recent polling from the Kaiser Family Foundation.
But the pharmaceutical market is much more opaque than markets for other goods. Drug companies have little say over what patients end up paying for their drugs. Those decisions are mostly left to PBMs.
PBMs work on behalf of insurers and large employers to oversee the drug-related details of health plans.
PBMs decide which treatments should, and shouldn't, be included on health plans' formularies, or list of covered medicines.
And they make those coverage decisions in large part based on the size of the discounts that drug companies are willing to offer in exchange for inclusion on those formularies.
Three PBMs — Express Scripts, CVS Caremark, and Optum Rx — control roughly 80% of the market, so they have quite a bit of negotiating leverage.
PBMs pass most of the negotiated savings along to their insurer and large-employer clients but keep some for themselves as profit.
Insurers, in turn, can use the savings to offer lower premiums to all beneficiaries.
The exact terms of these negotiations are secret.
This opaque system creates a perverse incentive whereby PBMs are actually better off when a drug's nominal, or "list," price is artificially high — so they can demand a bigger discount.
If a PBM is negotiating a 50% discount off a drug's list price — and gets to keep a share for itself — it can make more money on a $1,000 drug than an equally effective $800 drug.
This, in turn, is a disaster for patients, who have to fork over copays and coinsurance at the pharmacy counter based on the list price of drugs, rather than the much-lower net price secured by the PBM.
PBMs are also using a technique called "spread pricing" to overcharge health insurers, including public payers like Medicaid. They simply charge the payer more than what they actually pay the pharmacy — and pocket the difference.
This isn't the only tactic PBMs employ to boost their bottom lines.
In recent years, PBM profits flowing from the administrative fees they charge pharmaceutical firms has increased by over half.
Between 2017 and 2019, gross profit for PBMs rose by 12% to $28 billion.
Those profits are largely realized out of sight.
People pay more for prescription drugs and have no idea why.
According to one recent survey, over 70% of voters know little or nothing about PBMs.
With any luck, Congress's recent push for PBM reform will shine some much-needed light on this shadowy corner of the health sector.
The bills under consideration target everything from spread pricing to secretive rebate deals. The Senate Finance Committee's reform would also delink PBM compensation from a drug's list price — so that PBMs don't make more money by favoring heavily discounted medications with high list prices on their insurer clients' formularies.
Whether lawmakers will be able to enact meaningful reforms before the August recess is anyone's guess.
But Congress's newfound enthusiasm for the issue offers some hope that the PBM industry's stranglehold on the prescription drug market might, at long last, be loosening.
Sally C. Pipes is president, CEO, and the Thomas W. Smith fellow in healthcare policy at the Pacific Research Institute. Her latest book is "False Premise, False Promise: The Disastrous Reality of Medicare for All," (Encounter Books 2020). Follow her on Twitter @sallypipes. Read Sally Pipes' Reports — More Here.
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