Amid concerns about the escalating cost of prescription drugs, the Senate’s Health, Education, Labor, and Pensions (HELP) Committee held hearings this summer to frame the Senate’s efforts moving forward. The committee heard a broad variety of proposals ranging from utilizing outcomes-based payment to removing barriers for importation of Canadian medicines.
Eventually, the committee turned its attention to pharmaceutical supply chain structure and the role it plays in raising the cost of prescription drugs for patients. It was here that scrutiny of the muddled practices of pharmacy benefit managers (PBMs) intensified, and the members appeared capable of reaching a bipartisan consensus.
PBMs operate as intermediaries contracted by health plans to process prescription drug claims, implement utilization management tools, and determine the structure of a health plan’s drug benefits program. An evolution of their original role in which PBMs simply processed transactions and claims for a health plan, PBMs now play a key role in structuring a health plan’s business model. Given purview over a health plan’s drug benefit program, PBMs control a key aspect of the pharmaceutical supply chain. Their purchasing decisions determine which prescription drugs are available to a health plan’s policy holders, providing enormous influence over distribution and sales of manufacturers’ products.
These purchasing preferences are represented in the design of tiered formularies, where a PBM’s “preferred” drug is placed on a lower tier that requires a smaller co-payment by patients. Non-preferred drugs are placed on a higher, more expensive, tier or excluded altogether. Where possible, patients will gravitate toward the least costly effective treatment, making the tier a drug is placed on hugely influential for volume of sales. This system of drug benefit program design has made PBMs exceptionally effective at negotiating price concessions from pharmaceutical manufacturers by forcing a race to the bottom for advantageous tier placement on a plan’s formulary.
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PBMs’ negotiating leverage in this respect is enhanced by the small number of PBMs that control the vast majority of covered lives in the United States. Only three PBMs control roughly three-fourths of all covered lives in the United States, making refusal to acquiesce to concession demands untenable. Market share losses of the magnitude controlled by the top three PBMs are prohibitive, and competing manufacturers are always waiting in the wings to underbid competitors.
The concentration of plans represented by only three PBMs is necessarily anticompetitive, but it is not an inherently deleterious development with respect to delivering lower drug costs to consumers. Indeed, the negotiating power afforded by such a concentrated market share necessarily lends itself to leveraging substantial concessions from pharmaceutical manufacturers during negotiations. Problems arise when consumers fail to realize the savings produced by this consolidation, and are met with onerous and escalating prescription drug costs instead.
When PBMs occupy the 6th, 7th, and 22nd spots on the Forbes 500 with the closest pharmaceutical manufacturer ranking 35th, stakeholders must wonder whether their collective bargaining power has been commandeered by PBMs to line their own pockets under the façade of delivering savings to patients. Profits earned by PBMs have soared over the course of the last decade while patients’ drug costs have increased, suggesting an immense incongruence between PBMs’ interests and those of their de-facto downstream clients.
Indeed, the manner in which PBMs generate revenue makes them subject to perverse incentives where escalating prescription drug prices are good for business. Instead of passing price concessions on to health plans, PBMs will often retain a substantial portion of the concession for themselves, leaving health plans, and ultimately consumers in the form of premiums, to bear the full cost of procuring the drug.