Editor's note: David Balto is a public interest antitrust attorney and is the former policy director of the Federal Trade Commission.
Controlling drug prices is a vital public concern. Nearly 80% of Americans believe the cost of prescriptions is "unreasonable," according to recent polling from the Kaiser Family Foundation.
Yet the approaches currently being considered in Congress ignore a major cause of the program — the rebate schemes used by unregulated middlemen known as pharmacy benefit managers.
These PBMs administer drug plans on behalf of insurers. Like middlemen in other industries, they don't actually produce anything. They simply decide which medicines to cover — and which ones to exclude — and at what prices. Yet they pocket a huge portion of every dollar spent on pharmaceuticals. According to a report from the White House Council of Economic Advisers, "over 20 percent of spending on prescription drugs was taken in as profit by the pharmaceutical distribution system."
The PBM market lacks the three elements essential for competition — choice, transparency and a lack of conflict of interest.
The lack of choice is obvious. Just three companies — CVS Caremark, OptumRX, and Express Scripts — control 85% of the market.
As the Council of Economic Advisors has noted, this oligopolistic pricing power allows PBMs to "exercise undue market power against manufacturers and against the health plans and beneficiaries they are supposed to be representing, thus generating outsized profits for themselves."
There is little to no transparency, as PBM rebate schemes are obscure and PBMs fight over any attempts to require transparency.
And the conflicts of interest are immense. PBMs are supposed to lower drug prices for the employers and unions they serve.
But since they profit through these non-transparent rebates, they have an interest in higher — not lower — drug prices. As the Council of Economic Advisers explains, the "system encourages manufacturers to set artificially high list prices, which are reduced via manufacturers' rebates but leave uninsured individuals facing high drug prices."
Eye-popping list prices for medication are a direct result of PBM tactics. As total rebates have skyrocketed in recent years — rising from $102 billion in 2014 to $187 billion in 2020 — PBMs have created lucrative positions for themselves, pocketing a significant share of these disbursements.
Here's how it works: The PBMs demand discounts or rebates from drugmakers, which they can do because they hold a major bargaining chip, in that they decide what drugs to include on insurance company formularies. If a medicine isn't on the formularies, the manufacturer won't be able to sell much of it.
The drug companies are forced to increase list prices so they can afford to offer discounts to the PBMs. Indeed, Sens. Ron Wyden, D-Ore. and Chuck Grassley's, R-Iowa, investigation into insulin prices earlier this year concluded that "PBMs [use] their size and aggressive negotiating tactics, like the threat of excluding drugs from formularies, to extract more ... rebates, discounts and fees from insulin manufacturers." These tactics, in turn, drive list prices higher and higher.
Take Eli Lilly, one of the world's largest insulin makers. In testimony to Congress, it reported that between 2014 and 2018 it increased the list price of its best-selling insulin by 52%. But Lilly didn't reap a windfall — the manufacturer was backed into a corner by PBMs' demands for hefty discounts. In fact, after paying rebates to the benefit managers, Lilly's net price fell by more than 8%.
Sanofi has faced similar pressure to either meet PBMs' ever-higher rebate expectations "or face exclusion from formularies." And as Sanofi's discount offerings shot up over 50 percentage points for preferred placement, the manufacturer was driven to increase the list price of its long-acting insulin from $303 in 2014 to $404 in 2019.
The lawmakers who want to include drug price controls in the reconciliation package hope the "savings" will help pay for other parts of the spending bill, on worthy initiatives ranging from social services to climate change. But their reform efforts currently ignore this uncompetitive and anti-consumer PBM rebate system.
First, Congress could mandate that PBMs be fully transparent — by making regular reports to the public and private insurers who rely on them, detailing costs and fees associated with rebate negotiations.
Second, lawmakers could require PBMs to pass negotiated rebates along to health plans and patients, keeping only a fixed fee for their services, rather than an undisclosed percentage of the total rebates they negotiate.
Third, legislators could prohibit the practice of "spread pricing," which is when health plans and patients are charged more for a drug than the PBM pays.
Focusing on drug prices is crucial, but any reform must address the PBM rebate schemes. Reforming the broken PBM industry is the surest way to reduce the price of vital medicines so that all Americans can access the care they need.