NRPLUS MEMBER ARTICLE F or decades, lobbyists for the pharmacy-benefit-management (PBM) industry have been telling policy-makers, employers, and patients that PBMs (middlemen responsible for the administration of the prescription-drug benefit for various health-plan payers) save everyone money. They argue that opaque negotiation, rebate contracting, and vertical and horizontal integration are intended to help lower biopharmaceutical spending. Unfortunately, the promises of savings are a mirage, with no data-driven analysis to back them up. The PBM industry is thus staunchly opposed to laws that provide transparency into their business practices.
Fortunately, states and federal legislators are finally taking action. They have decided to scrutinize the flow of untold billions of dollars in discounts, fees, concessions, and rebates that are siphoned off from the biopharmaceutical industry by the pharmacy-benefit managers. The estimated total collected by the middlemen is over $200 billion annually, which makes up almost 40 percent of drug spending in the U.S. Unfortunately, because of a lack of transparency, no one, including federal and state governments, has a clue as to how much of that money provided by the pharmaceutical industry is kept by PBMs. At best, there are estimates by various governmental agencies of the amount of savings that is passed back to those who are supposed to benefit from the work of PBMs: the employers, the state and federal governments, and most importantly, the patients. It is important to note that such estimates are primarily based on modeling data, testimony by PBM officials, or incomplete information.
For starters, Texas has discovered that a good percentage (20.5 percent in 2020 and 13 percent in 2021, according to data provided to the state by PBMs) of the rebates and fees that the PBMs collect is pocketed as profit, and less than 0.5 percent of those savings is passed back to the patients. As for the rest of the savings, the PBMs claim that they pass it back to the issuer, which most often happens to be the insurance companies who own the PBM. The three largest PBMs in the U.S., which control almost 80 percent of the retail prescription market and close to 70 percent of the dispensing of specialty drugs, are subsidiaries of the three largest insurance companies — or, more aptly, plan sponsors/issuer. In other words, in the nontransparent PBM universe, one hand collects the money on behalf of issuers, then passes it on to the other hand, which happens to be the insurance company, and claims it as savings for patients, employers, and the taxpayers of the State of Texas.
Texas is not the only state that has passed a transparency law mandating that PBMs share information with the state. In 2017, California passed S.B. 17, requiring insurers that file rate information with the Department of Managed Healthcare (DMHC) or the California Department of Insurance (CDI) to report annually specific information related to the costs of covered prescription drugs. The latest report for the plan year 2021 follows the pattern from previous years: The growth in biopharmaceutical spending in California is outpaced by overall medical expenditure and increases in premiums. Most importantly, almost all of the rise in drug spending is nullified by an increase in rebates provided to insurers.
The Texas and California transparency laws have spurred other states to act. We may also see some federal activity on the topic of transparency, as lawmakers seek an accurate accounting of all of the concessions, rebates, and fees that PBMs collect. But such endeavors are the starting point. The primary goal of any legislation should be for patients to save money at the pharmacy counter. We know today that the policies championed by PBMs directly hurt patient affordability. For example, why are coinsurance and deductibles for pharmaceuticals calculated based on the retail price of a medicine? PBMs negotiate significantly lower prices, but none of those concessions end up in the patient’s pocket. PBMs have bamboozled employers and government entities into thinking that out-of-pocket calculations should be based on inflated gross prices. Simply put, the biopharmaceutical benefit is the only health-care benefit under which patients pay based on a list price instead of a negotiated one. In every other segment of the health-care system, patients’ coinsurance or deductible is based on a price negotiated to be significantly lower by the insurer on the patients’ behalf.
The dependence on rebate contracting also creates misaligned incentives. A study published in 2022 demonstrated that medications essential for patient care are excluded without much medical justification from formularies (i.e., lists of drugs covered by the PBMs) and that generics are excluded in favor of brand-name drugs. These exclusions stem from the PBMs’ desire to cover higher-priced medicines that provide the largest rebates. In effect, formularies have become a tool for rebate maximization rather than cost reduction. The persistent excuse from PBMs and their lobbyists is that such secretive rebate contracts are necessary to drive down net prices. But this is nonsensical. Just look at the case of one of the country’s largest insurers, Kaiser Permanente, which doesn’t use the rebate-contracting tactic and doesn’t employ a PBM to negotiate contracts for them.
More insidious are the policies enforced by PBMs regarding generic medicines. Extensive research indicates that states, the federal government, and, most importantly, patients overpay for generic drugs daily. Billions of dollars are pocketed as profit through spread-pricing, the practice of charging state and federal government more than what PBM reimburses pharmacies. Further, the mandate of claw-back policy by PBMs forces patients to pay more (their out-of-pocket cost) for a generic when they use their insurance benefit rather than what the PBM reimburses a pharmacy. For example, a patient goes to pick up a prescription from the pharmacy and pays a co-payment — let’s say $10. The pharmacy, based on a negotiated fee with the PBM, gets reimbursed $5 for dispensing that drug. The assumption is that the pharmacy keeps the difference and profits $5. But that is not the case. The PBM claws back the difference of $5 as profit. Hence the patient has overpaid for the medicine. Most recent data demonstrate that almost 30 percent of the time, when a generic is dispensed at a pharmacy, a patient overpays for that medicine, and the PBM captures the differential as profit.
Finally, policy-makers should mandate that biopharmaceutical companies disclose how the concessions paid to the PBMs and tactics such as formulary positioning by the PBMs affect the PBMs’ pricing strategy for individual medicines. For far too long, the biopharmaceutical industry has wrongfully protected the PBM business model by falsely defining the benefit managers as “payers” rather than the middlemen that they really are. Patients, employers, and government are the genuine “payers” in our current health-care financing model.
Transparency laws will ensure that we have accurate data to implement commonsense policy solutions. Such laws will operate as a safeguard that concessions captured by PBMs from the biopharmaceutical industry end up benefiting patients. More importantly, they will help offset any profiteering by the generics. Legislating more transparency will allow us to deploy a pharmaceutical financing model that benefits patients, not PBMs.
Robert Popovian, Pharm.D., MS, is chief science-policy officer at the Global Healthy Living Foundation, senior health-policy fellow at the Progressive Policy Institute, and visiting health-policy fellow at the Pioneer Institute. Catherine Barr Windels is the president of the Policy Workshop.