3 signs the PBMs are desperately in need of reform

A new Trump administration rule is forcing drug middlemen known as Pharmacy Benefit Managers (PBMs) to direct some of the rebates they receive back to the consumers they're supposed to be representing has sparked a major lobbying brawl in the health-care industry.

The specific Trump proposal is relatively narrow: it requires PBM drug copays to be based on what they pay wholesale for a drug, instead of its list price, thereby guaranteeing that consumers realize the gains instead of the middlemen.

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But the policy is one of the first significant blows against the increasingly powerful PBMs.

PBMs are supposed to use their market power to negotiate better drug plans for the insurance plan enrollees they represent, but in the past several years, evidence is mounting that something is very wrong in their corner of the health-care universe.

Here are five signs this industry is desperately in need of reform:

Copay costs more than the drug? Wait, what?

Most people think they pay hefty insurance premiums so that when they do need care, the insurance companies pay most of the cost. By and large, that's true. But now an increasing number of patients are having the bewildering experience of finding out their prescription drug is cheaper to buy out-of-pocket. Sometimes much cheaper.

Last summer, PBS published a groundbreaking expose on the practice, highlighting an academic study which estimated copays are above the rates reimbursed to pharmacies an astonishing 25 percent of the time, resulting in a $135 million in annual revenue.

The story also includes one of the most remarkable "liar, liar, pants on fire" interactions ever between Express Scripts, one of the three big PBMs and PBS. Asked for comment, Express Scripts stuck to its increasingly untenable denials, even when confronted by the testimony of numerous pharmacists, internal company documents and an on-the-record admission from their insurance plan partner. 

Rapid consolidation + vertical integration = less competition

This isn't your parents' PBM market. In the last few years, the industry has undergone a radical transformation borne out of rapid consolidation and vertical integration. 

Most importantly, the three big players, Express Scripts, OptumRx and CVS Caremark, have now all merged with giant health insurance companies, seemingly driving up costs.

For example, a 60 Minutes report highlighted how Express Scripts, one of the big three PBMs, purchased large quantities of Mallinckrodt's Acthar Gel, one of the most expensive and allegedly ineffective drugs on the market, for its insurance plan clients at top dollar. According to reports, Acthar Gel sold at $40,000 a vial (the same drug went for $40 in 2001).

The spate of mergers is also a sign that sheer market power has completely eclipsed serving customers well as the primary means of advancing. It's especially concerning because these companies don't actually produce anything themselves; they're middlemen. 

"Rapid consolidation" doesn't quite capture the historic scale at which the industry has folded into three companies, each partnered with insurance conglomerates, that now control roughly eight in ten pharmaceutical drug purchases in the United States.

Channeling "Jaws," one analyst described the state of the industry as "you're going to need a bigger boat." Others, including the White House Council of Economic Advisers, have noted consolidation's role in escalating prices. And Rep. Buddy CarterEarl (Buddy) Leroy CarterRepublicans storm closed-door hearing to protest impeachment inquiry Mass shootings have hit 158 House districts so far this year Polling director: Young voters swayed by health care, economy, gun control MORE (R-Ga.), Congress' only pharmacist, has ominously warned that PBMs are the single least transparent players in the entire health-care system.

Gag orders

Speaking of which, one could hardly discuss the PBMs without mentioning the ugly practice of using gag orders on pharmacies and other potential whistle-blowers to keep their unwitting customers in the dark about ripoff copays.

Although ultimately curtailed by a literal act of Congress, the PBMs for years kept a lid on their hundred-million-dollar golden goose by contractually preventing pharmacies from spilling the beans to customers the same drug could be had for much cheaper, just by ditching the insurance coverage that's supposed to make it cheaper. 

What well-functioning market that you know of involves legally preventing retail stores of informing customers they can buy the same product for less money? 

Conclusion

Fortunately, the Trump administration is beginning to reign in these pharmaceutical pirates. Most experts believe the administration's new rule will go a long way towards realigning the incentives of PBMs back towards their customers — the people they're supposed to be working for in the first place. After all, even PBM companies can be useful to society when competition channels their energy towards improving the lives of the rest of us. 

Editor's note: This column has been updated from the original to remove an incorrect statement about Mallinckrodt. 

Benjamin Alli, M.D., Ph.D., is a Sakellarides professor of medicine and surgery and the chancellor of the Royal College of Physicians and Surgeons of the United States of America.