Recently, the Trump administration finalized a rule to require drug companies to disclose the list prices of their drugs in direct-to-consumer advertisements. It appears to be a step toward greater transparency in the pharmaceutical market, but its impact is likely to be overshadowed by a much deeper problem: the billions of dollars in drug rebates captured by pharmacy benefit managers (PBMs) that should be used to lower consumer prices at the pharmaceutical counter. A recent survey of 1,000 heads-of-household finds the vast majority of consumers agree.
As background, pharmacy benefits managers (PBMs) are hired by insurers, employers, and government entities to administer the drug plans of more than 230 million Americans. Their job is to aggregate the collective buying power of plan enrollees in order to obtain lower prices for prescription drugs. PBMs negotiate drug rebates with pharmaceutical manufacturers and discounts with retail pharmacies, provide drug utilization reviews, and create a formulary that encourages or even requires health plan participants to use preferred products to treat their conditions.
When a plan sponsor hires a PBM to manage its prescription plan, it expects the PBM to act with the sponsor’s best interest in mind. For PBMs, that means negotiating the lowest possible rates with manufacturers and pharmacies and passing those savings on to the plan sponsor and individual consumers.
But PBMs hide from their clients what they pay for prescriptions and often fail to disclose appropriate information about the rebates they negotiate with manufacturers. This lack of transparency undermines accountability and allows PBMs to accrue large profits that should be passed on to plan sponsors and enrollees.
PBMs derive substantial revenue from “clawbacks” they collect when the total cost of a drug is less than the patient’s copay. Suppose you pay a $15 copay to fill a prescription, but (unbeknownst to you) the actual cost of the drug is only $10. Then your PBM would collect a $5 clawback, and you would have been better off buying the medicine outside of your plan. Clawbacks are rampant; a study found that customers overpaid for their prescriptions 23 percent of the time, overpaying by an average of $7.69. PBMs do all they can to prevent consumers from making informed decisions; pharmacists are often bound by “gag clauses” in their contracts with PBMs not to disclose transparent pricing information to customers.
Another common practice is “spread pricing,” where PBMs bill plan sponsors significantly more for drugs than the discounted rate they’ve negotiated with the pharmacy. For example, an investigation by Bloomberg revealed that a PBM was billing a plan sponsor almost $200 for a bottle of pills that it purchased from the pharmacy for less than $6. Because PBMs’ deals with pharmacies are confidential, plan sponsors are unaware of the enormous markups PBMs collect on these transactions.
PBMs also manipulate the lists of drugs — called a formulary — available to plan enrollees. Manufacturers will give PBMs larger rebates for including a more expensive drug in their formulary and excluding competitors’ products. Because PBMs’ rebates are usually calculated as a percentage of the manufacturer’s list price, PBMs receive a larger rebate for expensive drugs than they do for ones that may have equivalent clinical value at a lower price. As a result, consumers are forced to pay higher prices and face fewer treatment options. One estimate suggests that PBMs, along with insurers and government health programs, pocket nearly $120 billion in rebates and discounts that could be passed along to consumers.
Americans agree that PBMs secretive and anti-competitive dealings have to be reined in. A recent survey commissioned by the American Consumer Institute found that 83 percent of the American people support government action to ensure that the rebates negotiated by PBMs are reflected in lower prescription prices for patients. Consensus on this issue cuts across political divisions: 86 percent of Republicans, 79 percent of Democrats, and 91 percent of independents support reforms. Across age groups, seniors expressed 83 percent support, compared to 78 percent of young adults.
States are beginning to take action to increase transparency in the PBM industry and mitigate the information asymmetries that drive PBMs’ market power. But more progress is needed at the state and federal levels. Plan sponsors must have sufficient knowledge to purchase PBM services rationally, with information on quality and negotiated rates. Pharmacists should be allowed to tell customers when purchasing drugs outside of their PBM plan is cheaper. And the public should know the extent to which the rebates PBMs negotiate are being shared with plan sponsors and beneficiaries.
In every sector of the economy, transparent pricing ensures the survival of the most efficient firms and results in lower prices as firms compete for market share. There’s no reason to think the PBM industry is an exception.
Liam Sigaud works on economic policy and research for the American Consumer Institute, a nonprofit educational and research organization. For more information about the Institute, visitwww.TheAmericanConsumer.Org.