There’s a move afoot in Congress to do something about prescription drug middlemen—Pharmacy Benefit Managers (“PBMs”). But, whatever the fix, it won’t bring down drug prices. Here’s a primer as to why:
What are PBMs? PBMs are large companies, often owned by health insurers and/or large pharmacy chains, that are supposed to negotiate lower drug prices with pharmaceutical companies by securing discounts and “rebates” off of their prices. Based on those negotiations, PBMs design a health insurer’s drug formulary—a list of covered drugs—structuring copay tiers and processing prescription drugs claims, among other things.
What happens to the discounts and rebates the PBMs secure? PBMs and their clients (generally, insurance companies) often pocket most of those rebates rather than use them to lower drug prices for patients. They claim that their ability to retain some – or all – of that money is what drives them to negotiate for lower prices. That promise appears disingenuous at best when much of that money never reaches patients.
Why don’t insurers insist on PBMs distributing the rebates? PBMs demand higher administrative fees from insurers when insurers do not allow them to retain the rebates. And, when insurance companies insist on receiving the rebates from PBMs, there is no assurance that the insurance company will pass the savings along to patients. Moreover, if the insurance company itself owns the PBM, as several do, the insurer effectively pockets the rebates.
What are some of the PBMs’ strategies?
- They maximize their own profits by negotiating and retaining the largest rebates possible. When rebates are designed as a percentage of the list price, the higher the price, the larger the rebate opportunity for the PBM. That perverse incentive undermines the PBM promise of lowering the cost of prescription drugs.
- It is in the PBM’s interest to put the most expensive drugs on their formularies and keep some of the less costly alternatives (e.g. generics) off of their formularies.
- PBMs often “claw back” money from community pharmacies when a patient’s copay is larger than the drug price the PBM negotiated with a pharmacy. Those patients are paying larger copays than what they would have paid had they purchased the drug without insurance.
How can Congress address these problems with PBMs?
- Eliminate the multiple restrictions on federal price negotiations, require the federal government to meaningfully negotiate the prices of all prescription drugs, and make those prices available to all Americans. The value of government drug price negotiations should be made available to everyone – including through Medicare Part D plans and commercial insurers and directly to those Americans without insurance.
- The federal government, not PBMs, should determine which prescription drugs are on a formulary. The federal government should determine which drugs deliver the most value and construct the appropriate formulary. When formularies are developed based upon negotiations between PBMs and manufacturers, both parties have a business case to inflate drug prices.
- Build upon the successful model of formulary development at the Veterans Administration and establish one clinically solid formulary for all Americans. The VA has one main formulary, designed by clinicians to meet the clinical needs of veterans and negotiated within parameters established by those clinicians. There are no middlemen; the VA’s only interest is in getting the most clinically appropriate formulary at the best value for all veterans. The same philosophy should be applied everywhere.
- Allow patients to import prescription drugs from other countries. The United States allows wholesalers to purchase and sell drugs that are manufactured overseas. The federal government should construct a list of nations with drug-approval processes comparable to that in the United States and allow Americans to import prescription drugs from those countries.
In sum, the most meaningful way to bring down drug prices is through government drug price negotiation. For now, Congress should allow people to import prescription drugs from abroad and require insurers to cover those imported drugs that cost less than they do in the US.
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