The completion of the longest government shutdown in history and the growing political acrimony rightfully get a lot of attention, but that focus makes it easy to overlook areas where beneficial legislation is politically possible. The broad political agreement that reform of the way pharmacy benefit managers (PBMs) operate is necessary exemplifies the potential bipartisan opportunities.
The opacity and misguided incentives that plague the PBM market are currently hurting patients. PBMs reduce the efficiency of the prescription drug market, divert billions of dollars to these middlemen in the supply chain, and increase costs for employers, consumers, and taxpayers.
PBMs claim to keep drug costs down by negotiating drug prices on behalf of insurers and managing drug formularies — the list of drugs that insurers will cover. Through these roles, PBMs substantially influence which drugs patients can access and the terms of that coverage, including patients’ out-of-pocket obligations.
Since deductibles are rising faster than list prices, the net prices insurers pay have been declining for many years. This means that PBMs and the health insurers that own them now can earn these discounts because insurers’ costs are based on the much lower net prices.
This system, although extremely complicated, would be fine if patients also directly benefited from these discounts. The problem arises because patients don’t, only PBMs and insurers do. Patients do not benefit from these discounts because their costs are usually associated with inflated list prices.
As a result, patients are on the hook for an ever-increasing share of the costs for expensive drugs. PBMs and insurance companies earn huge revenues by inflating these list prices, which incentivizes them to favor drugs with higher list prices, and subsequently larger discounts, in their formularies. The preference for higher list price drugs increases costs for patients and the broader health care system.
The Federal Trade Commission (FTC) agreed with this assessment to examine the industry, documenting how PBMs game the system and drive up costs for patients. Lawmakers have caught on to these games, too, which is why Congress is considering PBM reforms that would effectively address these problems.
In planning these reforms, it is important to consider the ongoing evolution of the PBM business model. The latest iteration uses group purchasing organizations (GPOs) to place yet another organizational layer between PBMs and drug purchasers.
On paper, PBMs and GPOs do essentially the same thing – leverage their collective buying power to negotiate lower prices. But creating GPOs, some of which are based abroad (in Switzerland for example), PBMs can continue their current practices with less scrutiny.
For example, PBM and GPO fees are counted for just 5% of PBM profits in 2012, when PBMs earned most of their revenue by pocketing a portion of their negotiated rebates. In response to criticism that this practice was inappropriate, PBMs began passing the majority of these rebates on to insurers.
Of course, since the three largest PBMs are part of a healthcare group that includes an insurance company, this is a distinction without a difference. Additionally, PBMs have simply expanded their revenue from GPO fees to grow to over 20% of PBM profits by 2023. It’s tactics like these that have been diverted 50 cents out of every dollar spent on pharmaceutical drugs at various intermediaries, including PBMs, government-mandated rebates and fees, and the 340B drug rebate program.
The House Oversight and Government Reform Committee recently announced its intention to investigate how PBMs use GPOs to avoid oversight and hide their profits overseas. This research should also explore how the Big Three PBMs are using GPOs to increase their revenue streams at the expense of American prescription drug purchasers.
It is undeniable that the prescription drug pricing system is in desperate need of reform. Out-of-pocket drug costs are rising even as net prices continue to decline. This discontinuity alone demonstrates why Congress must pass meaningful PBM reform that addresses the growing use of GPOs.
