Pharmacy Benefit Managers (PBMs) operate within a complex and often controversial landscape, drawing scrutiny from various stakeholders, including Congress, media outlets like The New York Times, and even influential figures like Elon Musk. Their primary role is to manage prescription drug benefits for insurance plan sponsors, achieving cost savings through negotiation and strategic formulary management. This has demonstrably contributed to the relatively low growth rate of Medicare Part D premiums, significantly below the rate of inflation. However, the PBM model inherently positions them as adversaries to both drug manufacturers and pharmacies, creating a dynamic rife with potential conflicts of interest.
The adversarial relationship between PBMs and drug manufacturers revolves around formulary placement and rebates. PBMs leverage their control over which drugs are included in formularies to negotiate rebates from manufacturers. Drugs placed favorably on formularies tend to experience higher sales volumes, incentivizing manufacturers to offer substantial rebates. This system, however, is distorted by the existence of “safe harbor” protections, which exempt these rebates from federal anti-kickback statutes. This exemption perversely incentivizes PBMs to favor drugs with high list prices and high rebates, even if lower-priced alternatives exist, as they can retain a larger portion of the rebate. This practice contributes to escalating list prices and consequently increases patient cost-sharing when it is tied to these inflated list prices.
On the other side of the equation, PBMs impact pharmacy revenue through reimbursement practices. For generic drugs, PBMs often employ “spread pricing,” where they charge plan sponsors a higher price for a drug than they reimburse to the dispensing pharmacy, pocketing the difference. While this practice resembles the markup strategies employed by intermediaries in other industries, the unique nature of the pharmaceutical market complicates the issue. Generic drugs, due to their low cost and predictable utilization, are arguably not economically insurable. A more efficient model, akin to paying for routine car maintenance, would involve direct transactions between patients and pharmacies, bypassing the administrative complexities and added costs of insurance. However, current insurance regulations mandate the coverage of generic drugs, even some over-the-counter medications, and restrict the use of Health Savings Accounts, thus perpetuating the involvement of PBMs and their spread pricing practices. This ultimately leads to inflated premiums for beneficiaries and reduced reimbursements for pharmacies. Consequently, cash prices at direct-pay platforms are often significantly lower than prices involving insurance, highlighting the cost inefficiencies introduced by the current system.
Recent legislative efforts, such as provisions in the original Continuing Resolution bill, have attempted to address some of the concerns surrounding PBM practices. Proposals like delinking PBM revenue from drug prices and banning spread pricing aim to support pharmacies and align incentives between PBMs and plan sponsors. However, these measures fall short of addressing the root causes of the problems: the safe harbor protections that incentivize rebate maximization and the insurance regulations that mandate the inclusion of generic drugs, thereby creating opportunities for spread pricing. Furthermore, some of these proposed changes could inadvertently weaken the ability of PBMs to negotiate lower drug prices, potentially leading to higher overall drug spending.
The complex interplay of incentives within the pharmaceutical supply chain means that every player seeks to maximize their own profits. There is no guarantee that weakening PBMs, without addressing the underlying systemic issues, will ultimately benefit patients. In fact, evidence suggests that bypassing insurance and PBMs altogether for certain drug transactions can lead to lower costs for patients. This underscores the need for a more fundamental reevaluation of the rules governing the pharmaceutical market.
Ultimately, many of the questionable behaviors exhibited by healthcare players, including PBMs, stem from flawed regulations – unintended consequences of well-intentioned laws. Rather than focusing on superficial fixes targeted at individual players, the focus should be on reforming the underlying rules of the game. By addressing the root causes of these issues – the safe harbor protections for rebates and the regulatory framework surrounding generic drug coverage – policymakers can create a more transparent, efficient, and patient-centered pharmaceutical market. This requires a shift from applying Band-Aid solutions to addressing the systemic flaws that drive these behaviors. The incoming Congress has an opportunity to prioritize these critical reforms and create a more sustainable and equitable pharmaceutical landscape for all stakeholders.
