This letter to the editor was originally published on STAT on Aug. 17, 2024.
This essay raises three presumed “facts” about pharmacy benefit managers (PBMs).
The first “fact” is that PBMs exist because insurers and self-insured employers use them. This is analogous to George Constanza’s contention that people will watch Seinfeld “because it’s on TV.” The authors contend that human resources departments seek proposals from PBMs through a competitive and transparent process, although they acknowledge that less sophisticated purchasers may need to hire biased brokers and consultants to assist them in signing self-serving contracts.
Having witnessed such negotiations first-hand, it is anything but a fair fight. Large PBMs often dazzle overmatched HR staff with promises of sophisticated algorithms that catch the smallest errors and disease management programs that will all but eradicate absenteeism, all while generating enough rebate dollars to fund a lavish holiday party. A few weeks later a phone-book sized contract will arrive, in English, but equally uninterpretable in any language. To call this process competitive and transparent is hardly a fact.
The second “fact” the authors offer is that high drug prices are primarily due to two acts of Congress, not PBMs, who they contend are the last line of defense in restraining drug prices. The two acts — patents for new drug development and protection from anti-kickback regulations — are important and broadly accepted, although one can debate specifics. What is most off-putting is a lack of discussion on the role PBMs play in increasing drug prices. I would refer those interested in more detail to the recent FTC report cataloging PBM behaviors, ” Pharmacy Benefit Managers: The Powerful Middlemen Inflating Drug Costs and Squeezing Main Street Pharmacies.”
In response to such criticisms, PBMs argue that drug prices would be higher in their absence. This is true not because they are efficient nor benevolent but rather because at their core they function as large group purchasing organizations. The largest PBMs negotiate on behalf of tens of millions of consumers and their size provides increased leverage in playing one manufacturer against another to obtain larger rebates. While pro-consumer in theory, the lack of transparency and inability of plan sponsors to assess how much PBMs generate in savings and how much they retain for themselves is the root issue, with plan sponsors and others having little to no ability to monitor PBM behavior.
Mattingly, Hyman, and Bai also ignore how PBMs’ thirst for larger rebates leads to higher drug prices. An executive of a large drug manufacturer said that during price negotiations a PBM representative said “if you raise your prices we will consider putting your drug on a lower (more favorable) tier.” They did not explicitly say raise your rebate, but the message was clear — increase the spread between the list and net price and we will reconsider your formulary status. The key is the degree to which negotiated discounts are passed on to plan sponsors and their members through reduced premiums and/or lower cost-sharing at the point-of-sale. PBMs provide valuable services and should be fairly compensated, but industry wide profits of $25 to $30 billion annually seem too high.
I have no argument with the authors’ third fact, which is that every player in the prescription drug supply chain wants to make money. This is true in U.S. health care markets more broadly, where private firms are simply responding to the demands of their shareholders and the financial incentives embedded in both commercial markets and government-funded programs such as Medicare and Medicaid. Recent revelations of upcoding and over-billing by health insurers in the Medicare Advantage program underscore this point. As the authors note, PBMs do not act in the interest of their clients because they are neither required nor incentivized to do so.
So what can be done? One option is to regulate PBMs under the federal Employee Retirement Income Security Act of 1974. ERISA sets minimum standards for most voluntarily established pension and health plans in private industry to provide protection for individuals in those plans. In essence, federal regulators would require the PBMs to act in the best interests of their clients. Giving ERISA regulators oversight of PBMs would change much of what is wrong in the pharmaceutical supply chain. It would return PBMs to their original and still important role of efficiently administrating drug benefits.
— Geoffrey Joyce is director of health policy at the Leonard D. Schaeffer Center for Health Policy & Economics at the University of Southern California.
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