As drug prices rise, Congress has tossed about for a new villain in the healthcare industry — and it isn’t Big Pharma.
Instead, there is an all-out campaign against pharmacy benefit managers (PBMs). Ads on YouTube, news sites, Pinterest, and Instagram represent the companies as scheming, oily businessmen trying to get between you and your medications.
Meanwhile, congressmen have been funneling at least nine bills through the House and the Senate, all of which increase price transparency by attacking opaque PBM practices — a move they claim would decrease medical costs. The most recent iteration is a package of bills that passed the House Committee on Education and the Workforce last Thursday.
The problem is that, perhaps unintuitively, transparency will likely increase rather than decrease costs for consumers — employers and medical plan managers.
PBMs Are Effective but Imperfect
PBMs operate as the middlemen between pharmaceutical companies and their customers. Their job is to negotiate the price of expensive drugs to ensure that Medicare Part D plans, employers, and other buyers get the best price available. The PBM company will then usually take a portion of the rebate it negotiates to make a profit — meaning that it has an incentive to negotiate rebates well. The more its customers save, the more money the company makes.
PBMs are also incredibly effective at their job: According to a recent government report, PBMs saved their customers 40–50 percent of the annual cost of prescription drugs. In fact, as Tom Schatz, president of Citizens Against Government Waste, noted last year, the federal government estimated in 2005 that Medicare Part D would “cost taxpayers $174 billion by 2015” — but thanks to PBMs, that number was only $75 billion.
They may be effective, but, like any big business in the healthcare industry, they are far from perfect. Just three PBMs control 80 percent of prescription drugs in the United States, and those three companies — Caremark, Express Scripts, and OptumRX — own or are owned by insurance companies, giving these companies a massive amount of control over which medicines patients pay for out of pocket and which are covered by insurance.
Ad campaigns, like the one PhRMA is currently running, claim that PBMs frequently won’t cover lower-priced drugs because they can’t negotiate as big a rebate and, therefore, wouldn’t make as much money on those drugs: “[They] often prefer medicines with higher prices because it pads their bottom line.” That may be true, but it doesn’t justify wrecking the PBM model for more expensive prescriptions.
Yet another problem these critics identify is the practice of spread pricing. Essentially, PBMs make a profit by charging health plans and insurance companies a higher price for prescription drugs than what they pay pharmacies. Rather than pass 100 percent of the rebates they’ve negotiated, they’re taking a little off the top. (READ MORE: Unveiling Liberal Indoctrination in Therapy Rooms: The Four Toxic Ideas Crippling Mental Health)
Spread pricing, however, is what incentivizes PBMs to negotiate bigger rebates. Even if it were a problem, evidence suggests that PBMs have been passing more of the rebates they negotiate to their customers — without congressional meddling. Pew Charitable Trusts found that in 2012, PBMs were passing through 78 percent of the rebates they negotiated to their customers. In 2016, that number rose to 91 percent.
Congress’ Solution Is Transparency
Given that 66 percent of Americans are on prescription drugs and most Americans don’t like shelling out thousands of dollars every year to pay for those prescriptions, there is a lot of bipartisan support for legislation that promises to lower drug costs, and a number of solutions have been proposed.
The package of bills passed by the House Committee on Education and the Workforce last Thursday was hailed by committee members and its sponsors as a way to banish “opaque” billing practices. The four bills would require hospitals to disclose their billing practices, bring “much needed light” to PBMs, give more access to cost and quality information to health care fiduciaries, and bolster the requirements for PBMs to disclose the compensation they’re receiving to their customers.
“Dishonest billing, opaque rules, and shady industry practices have left patients paying higher costs for health care,” Rep. Virginia Foxx (R-N.C.), chair of the committee, said, according to Fierce Healthcare. “Today’s passage of our bipartisan health care package makes great strides towards giving clarity to patients and building a health care system that is more transparent, affordable, and accessible.”
Like most legislation that comes out of Congress, the package contains some good and some bad. I don’t think anyone would complain about Congress forcing hospitals to bill their patients accurately and to describe how they arrive at that final (and generally massive) number. The problem with the legislation lies in forcing PBMs to be more transparent with the rebates they’re negotiating.
As David Hogberg pointed out in The American Spectator in February, requiring PBMs to be transparent could jeopardize their position in negotiations. Suppose a PBM is able to negotiate a $20 discount with one drugmaker but only a $10 discount with another for a similar drug — once that transaction is made available to the public, the first drugmaker isn’t going to be happy. Forcing PBMs to be transparent about their pricing robs them of their negotiating power. (READ THE ARTICLE: Pharmacy Benefit Managers Are Politicians’ Next Health Care Scapegoat)
Congress’s “transparency” solution meddles in a system that is already fairly effective on its own. Forcing transparency could actually drive drug prices up rather than lower them. It seems common sense, but it’s apparently worth saying: If congressmen are actually interested in reducing drug costs, they should consider aiding rather than attacking the companies whose business it is to negotiate for lower drug costs.
Aubrey Gulick is a recent graduate from Hillsdale College and the Intercollegiate Studies Institute Fellow at The American Spectator. When she isn’t writing, Aubrey enjoys long runs, solving rock climbs, and rattling windows with the 32-foot pipes on the organ. Follow her on Twitter @AubGulick.