Why are pharmacy benefit management companies -the businesses that put together the drug benefits for most Americans the latest target of drug price critics? PBMs generated nearly $130 billion in rebates – essentially cash that drug companies pay PBMs to reduce the cost of their products.
That’s nearly 30 percent of the $349 billion in gross revenues the drug industry generates each year. On top of that PBMs charge the sickest patients an average of 40 percent of the list price of medicines. So why not use these rebates to reduce drug costs.
The PBMs claim that $130 billion in rebates do lower drug prices for consumers.
In fact, they pass the rebates directly to insurance companies and some businesses that contract with the PBM. In turn, the health plans use their cut for anything they want. For example, a lawsuit against Anthem claims that the insurer used billions in rebate dollars to buy back its stock in preparation for its failed merger with Cigna.
Very little, if any, of that money, goes to the patients whose prescriptions make the rebate revenue happen. Moreover, the PBMs and insurers make the sickest patients pay between 30 and 100 percent of the retail (not rebated price) of medicines depending on the drug plan.
Additionally, the PBMs set up the drug benefit to maximize these rebates. That is, it will cover drugs that generate more rebates and discourage patients from taking others that produce less profit. That’s a big reason why many sick people must fail on one or more drugs before being able to get a drug that works covered.
Again, PBMs claim this fail first approach is based on medical science. But if that were the case there wouldn’t be big differences in the kind and sequence of drugs among PBMs and health plans. But they do. As a recent article about PBM coverage of multiple sclerosis drugs noted: “These variances suggest that objective review of medical literature is not the primary basis for guiding decisions about which medications to cover preferentially. What drives this variance is the opaque proprietary financial arrangements made between PBMs and pharmaceutical companies for preferential pricing and rebates.”
These rigged arrangements explain why most PBMs charge patients with cancer, multiple sclerosis, autoimmune diseases, HIV up to 50 percent of the list price of their medicines.
Indeed, the sickest 1 percent of patients (about 2.9 million Americans) generate $50 billion in rebates and another $10 billion from paying a chunk of the list price of the drug. Each patient is being overcharged $23,000.
Such cost sharing is associated with reduced use of medicines, that means people are sicker than they should be and wind up costing more. Which is why drug companies – on top of providing $130 in rebates, fees and discounts – also pay $7 billion to reduce the out of pocket consumer costs. Of course, that money also goes to the PBMs.
While PBMs are in the crosshairs, in fact they wouldn’t even exist if drug companies used them to sell their products. So why aren’t drug companies just passing all rebates directly to patients instead of paying rebates to PBMs? Why aren’t PBMs and insurers eliminating high cost sharing?
It’s all about the money. Government health programs, hospitals, insurers and PBMs count on that cash to pad their earnings and balance sheets. In fact, government regulations requiring rebates are at the heart of this injustice. By law drug companies must pay rebates and discounts of up to 60 percent to the Veteran’s Health system, Medicare and Medicaid if they want to sell their products to those programs. (So much for the claim that the government doesn’t ‘negotiate’ drug prices.)
No one should have to pay thousands out of pocket for lifesaving drugs. We don’t need price controls to address this situation. In fact, because all the rebate money comes from drug companies, they have the power to make a simple change in who benefits from the value new medicines generate. Medicines for the sickest 1 percent of patients increase productivity and reduce spending on other hospitals, doctor visit more than any change in the way health care is delivered. Passing through rebates will increase the social return on innovation and end the discriminatory practice of targeting the sickest patients with the highest drug costs.
Unless we end the rigged system of rebates, insurers, PBMs and drug companies will find themselves threatened with more government regulation. PBMs deserve the criticism they are receiving but every industry is involved. It’s time for them to stop manipulating drug benefits for their own self-interest. Our health and lives depend on it.
Robert Goldberg, PhD is Vice President of the Center for Medicine in the Public Interest
The views expressed by this author are their own and are not the views of The Hill.