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The Dose

More Bad News for PBMs: Another Report Suggests They Contribute to Higher Drug Prices

by Michael Rule | Mar 28, 2017

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A recent report by the American Consumer Institute (ACI) is the latest to take aim at PBMs for their role in increasing prescription drug costs. ACI's ConsmerGram entitled "Pharmacy Benefit Managers: Market Power and Lack of Transparency" makes a compelling case that the lack of transparency in PBM operations contribute to higher drug costs for patients and plan sponsors and also negatively impact retail pharmacies, particularly independent pharmacies.

For example, the ConsumerGram asserts that the PBMs have more complete information than the plan sponsors they represent given the PBMs negotiations with manufacturers and pharmacies. Since plan sponsors are not privy to these details, it leads to one sided, or asymmetric, information, or a "market failure." This market failure can allow PBMs to charge higher rates, or spreads, to plan sponsors by reimbursing pharmacies a lower amount than what is charged to the plan sponsor or to retain some of the rebates negotiated with manufacturers.

Manufacturers generally pay rebates to PBMs in exchange for exclusive or favorable tier listing for their drug on the PBMs formulary, or list of covered medications. This encourages the PBM to include the medication with the highest rebate not necessarily the medication in that class of drugs with the lowest price, leaving plan sponsors and patients to pay higher costs. Moreover, while PBMs claim to pass such rebates along to plan sponsors, a study for the Center for Medicine in the Public Interest found that most of the increase in prescription drug spending was on rebates retained by the PBMs.

Patients are also impacted by PBM rebates as patient cost sharing levels are determined by the price of the medication before discounts are applied, causing patients to pay higher out of pocket costs. PBMs can also create higher costs for patients if they employ the practice of copay "clawbacks," where the PBM dictates the pharmacy charge the patient a co-pay that is higher than the cost of the medication, then the PBM recoups the difference from the pharmacy. This recouped difference is kept by the PBM and not returned to the patient. Unfortunately, PBM "gag" clauses can prevent pharmacists from informing their patients that their medication may be less expensive if they did not use their insurance.

Finally, PBMs have a unique position with retail pharmacies in that the PBMs contract with these pharmacies and determine their payments for medications while also owning their own, usually mail-order or specialty, pharmacies. PBMs utilize their position when negotiating contracts with plan sponsors to include provisions that incentivize or require plan beneficiaries to use the PBM-owned pharmacy, without necessarily disclosing their ownership interest to the plan sponsor. This can again lead to higher costs for the plan sponsor as mail order medications aren't necessarily the less expensive option and can lead to extensive waste in the system.

As the ACI ConsumerGram, the Center for Medicine in the Public Interest report, along with other reports such as this, demonstrate, PBMs are a key driver in increasing drug costs. Their market power and lack of transparency places them in a position to dictate prices to pharmacies and charge higher prices to plan sponsors and beneficiaries, and retain a large portion of manufacturer rebates.

Given the oversized role PBMs play in the prescription drug supply chain, legislative solutions are necessary to bring greater transparency. Enactment of two bipartisan bills, S. 413/H.R. 1038 the Improving Transparency and Accuracy in Medicare Part D Drug Spending Act and H.R. 1316, the Prescription Drug Price Transparency Act, would be a good start.