While stasis in government may seem endemic these days, the high price of prescription drugs is the rare issue that generates bipartisan outrage. This has been especially true of late: the development of complex biologic drugs and gene therapies has led to the creation of drugs with price tags exceeding $1 million.
High drug prices have prompted Congress and the White House to debate a variety of strategies for containing prescription drug prices, and most of the presidential candidates have proposed plans of their own for combating high prices as well.
Prescription drug prices in the U.S. are high for many reasons, but the primary one is simply that we have a patent system that rewards the development of innovative drugs—which benefits us all--with a temporary monopoly. Of course, with monopoly rights come high prices, but there are very few drugs without viable therapeutic alternatives, and when a drug comes off-patent there many alternatives become available via generic drugs. This multitude of drugs requires careful coordination.
Some entity needs to manage the complex interactions between payers, insurers, pharmaceutical companies, pharmacies, and ultimately patients, and pharmacy benefit managers (PBMs) currently perform that task. Far from being nebulous organizations operating in the shadows, PBMs have operated in partnership with other players in the healthcare landscape to optimize benefits for decades.
Proposals to control high drug prices that focus on minimizing the impact of PBMs—as many currently do—ignore the nature of the market and risk further increasing drug expenses, which runs completely counter to their ostensible intent.
These various proposals to limit the role of PBMs continue to be considered both by Congress and the Trump administration, as well as several states. In addition, PBMs will be in the light at the U.S. Supreme Court in 2020, as it will determine whether ERISA prohibits the states from regulating their drug-reimbursement rates.
The Role of PBMs
Unfortunately, many of the proposals currently being discussed misdiagnose the cause of high drug prices, attaching much of the blame to PBMs and their role in benefit design. As a result, these proposals invariably prescribe steps to reduce the role of PBMs in prescription drug markets.
PBMs negotiate drug benefits on behalf of insurance companies, large employers, unions, state Medicaid programs, and other large buyers of prescription drugs. They are the only mechanism in the drug supply chain mitigating the impact of high drug prices on consumers.
PBMs are able to obtain lower prices because of their specialized knowledge, negotiation ability, and volume of covered lives gives them substantial leverage over pharmacies and pharmaceutical companies: If a pharmaceutical company refused to grant a discount on a drug it would risk foregoing a substantial amount of sales.
Additionally, pharmacy benefit managers employ a variety of tools to help their customers control costs, such as the use of specialty pharmacies, the implementation of programs that encourage patients to maintain their drug regimen, and tools that help patients to avoid unnecessary or potentially dangerous drug interactions.
But another important and less well understood component of the role of PBMs is that they offer different types of payment models so that payers can choose a model that best fits their covered population.
Generally speaking, pharmacy benefit managers get paid by either 1) charging for administering benefits for a defined group of enrollees; 2) rebates obtained from negotiations with pharmaceutical manufacturers; or 3) the difference between what their clients pay for a drug and what the pharmacy ultimately receives, referred to as “the spread.”
PBM payments may be comprised of one method or in combination, with the relative contribution of each varying across individual PBMs. Some payers prefer a fixed price while others prefer pass-through pricing.
Moreover, it is worth remembering that pharmacists mark up the price of the drugs they buy from their distributor or wholesaler as well, but do not receive any opprobrium for doing so. Importantly, a recent GAO report concluded that, at least for Medicare Part D, PBMs not only passed through 99.6 percent of drug rebate amounts to the Part D plans, but earned very little from spread pricing: “PBMs earned about $300,000 from spread pricing in 2016... [and] no revenue from spread pricing in either 2014 or 2015.” Indeed, one could argue this is a policy to fix a non-existent problem.
Despite this evidence, spread pricing is, in the eyes of many who glance superficially at this issue, nothing but unnecessary spending that comes directly out of the pockets of consumers and warrants intrusive policy intervention. The argument that this perspective engenders is that if we required pass-through pricing—the alternative to spread pricing—the money saved by eliminating the spread would instead go to their clients, and drug costs would be lower as a result.
It is a facile argument. The problem with this approach is that in this case—as in most cases—intermediaries such as PBMs provide value to the market by taking on financial risk and negotiating lower drug prices. Tying the hands of the PBM-payer interaction would do little to reduce drug price inflation, and it may very well make the market for prescription drugs even more dysfunctional than it currently is.
PBMs Create Value
Spread pricing is but one tool that pharmacy benefit managers offer payers to manage expenditures associated with their services. For example, when a PBM charges a payer more than it reimburses the pharmacy for a certain drug and retains the difference, this creates revenue for the PBM. But it is naive to think that PBMs are doing this without the knowledge of payers and without offering meaningful reductions in administrative fees in response. The reductions translate into lower premium expense for enrollees.
Limiting or eliminating spread pricing will not reduce drug prices or insurance premiums or enrollees’ out of pocket payments, it would directly benefit the pharmaceutical manufacturers. Indeed, it is easy to imagine that a PBM with limited tools could have the exact opposite results than what the policy intended. This would be far from the first time a regulatory effort led to such an outcome.
The High Stakes of Getting Drug Policy Wrong
The U.S. market for prescription drugs is enormous—foughly $330 billion in 2018, or over $1,000 per person—and enormously complicated, and no fast or easy fix to high drug prices exists. Unfortunately, that reality is not going to stop politicians from offering what seem like easy solutions.
Like most “easy” solutions to difficult problems, these proposals focus on a convenient target of little purported value (PBMs in this instance) and rely on an incomplete understanding of the intricacies of the market. The invariable result is not just inefficacious policy, but also a potential increase in insurance premiums and a diminution of innovation in the market, which would be extremely detrimental in the long run.
The government should certainly take steps to ensure that a person’s ability to pay does not restrict their access to life-saving medicine. Providing healthy subsidies to low-income households to obtain insurance that would pay for such treatments achieves that for many. It should also ensure that there is competition in the pharmaceutical space, both among brand-name drugs and in the generic sector.
But at a remarkable time in history when we are developing the ability to create drugs to cure diseases that had been effective death sentences, too much is at stake for ill-considered and risky “solutions” to the problem of high drug prices.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Ike Brannon is a senior fellow at the Jack Kemp Foundation. He was previously chief economist at the House Energy and Commerce Committee and a senior economist at the Office of Management and Budget.
Tony LoSasso is a professor of economics at DePaul University. His research spans several dimensions of health and labor economics, health policy and health services and outcomes research. He was previously a technical adviser for the Centers for Medicare and Medicaid Services.