Americans pay twice as much as residents of other developed countries for prescription drugs. And one of the many reasons why may be an obscure group of businesses that operate largely out of public view and have been credibly accused of jacking up prices.
Called pharmacy benefit managers, those businesses are finally getting the scrutiny they deserve, at both the state and federal levels. With careful regulation, officials can end practices that drive up medication costs for consumers.
Pharmacy benefit managers are the middlemen insurance companies hire to bargain with drugmakers. They negotiate prices and determine what drugs an insurer will cover — what is known as the insurer’s formulary.
In theory, PBMs can play a valuable role in keeping prices down if they can negotiate lower drug prices, spark competition in the industry, or ensure consumers have access to the cheapest drug available for their condition. PBM industry representatives say PBMs do save consumers money, by incentivizing patients to switch from brand-name to generic drugs and by using market power to drive down drug prices overall.
For example, in Massachusetts, CVS Caremark — one of the leading PBMs — says it saved clients $25 million since April 1 by excluding the expensive brand-name arthritis drug Humira from its formulary and directing patients to the similar but less expensive drug Hyrimoz.
PBMs blame drug manufacturers for high prices.
Now, drug manufacturers should be subject to scrutiny regarding their price setting, and there is certainly blame to go around for inflated drug prices. But several recent investigations have found that PBMs often do the opposite of what they claim — driving up the cost of medicine to line their own pockets.
Three main PBMs, CVS Caremark, Optum Rx, and Express Scripts, control around 80 percent of US prescriptions. In June, The New York Times published an investigation concluding that PBMs “steer patients toward pricier drugs, charge steep markups on what would otherwise be inexpensive medicines, and extract billions of dollars in hidden fees.”
For example, a common practice is for a drug company to charge a high sticker price, then give a large rebate to the PBM that includes the drug in a formulary. A portion of that rebate goes to the employer and a portion is held by the PBM. Insurance plans charge consumers copays based on the original sticker price — so a higher sticker price can mean higher copays but more PBM profit.
PBMs also discourage competition among pharmacies. The Federal Trade Commission this month published a report on PBMs that found that because the three major PBMs each have affiliated insurance plans and pharmacists, they can take advantage of their own pharmacies by paying them higher reimbursement rates, which hurts independent pharmacies and their clients. A recent Boston Globe story partially blamed PBMs for forcing independent pharmacies out of business.
The FTC report also found that PBMs and brand-name drug manufacturers negotiate rebates that are conditioned on the PBM limiting patient access to low-cost alternatives. These type of rebate practices, the FTC concluded, “urgently warrant further scrutiny and potential regulation.”
The US House Committee on Oversight and Accountability released its own report in conjunction with a July 23 hearing, which concluded that “PBMs inflate prescription drug costs and interfere with patient care for their own financial benefit.” This includes using anti-competitive practices to steer patients to affiliated pharmacies and using pricing strategies to overcharge insurers and payers and to steer patients toward more expensive drugs.
The Wall Street Journal reported that the FTC is preparing to sue the three major PBMs for reasons related to their rebate negotiations with drug manufacturers.
The industry has disputed most of these findings.
So are there ways to rein in PBMs’ price-inflating practices and return them to their mission of lowering drug costs and providing value to the health care system?
There are a few bills Congress is considering. The House passed a bill requiring transparency about drug discounts and PBMs’ relationships with other corporate entities. The Senate Finance Committee advanced a bill prohibiting Medicare compensation of PBMs based on a drug’s sticker price, imposing more federal regulatory oversight, and banning “spread pricing” in Medicaid, where a PBM charges an insurer more than it reimburses the pharmacy for a drug and pockets the difference. (An alternate model to spread pricing is paying the PBM a flat dispensing fee unrelated to drug prices.)
Massachusetts Congressman Jake Auchincloss recently introduced a bill to create a market-based pharmacy reimbursement model and to limit PBMs’ ability to steer patients to affiliated pharmacies, engage in spread pricing, or require a patient to obtain a brand-name drug instead of a generic.
At the state level, this editorial board has supported bringing pharmaceutical companies and pharmacy benefit mangers under the Health Policy Commission’s cost trends hearing process, which would require them to submit financial information to state regulators. The Senate passed a bill in November that would do this, and the House followed suit last Wednesday. The House bill would also require the Division of Insurance to license and audit PBMs, prohibit spread pricing and certain types of fees, require PBMs to reimburse all pharmacies at the same rates, and require that PBMs and insurers pass at least 80 percent of drug rebates onto the consumer.
Some of these requirements may be warranted, but the House bill is complicated and there’s little time for scrutiny, since it was released days before formal sessions end. Passing provisions immediately to bring PBMs under the Health Policy Commission’s jurisdiction and creating a state licensing scheme will give lawmakers the opportunity to gather the necessary information to determine what additional policies make sense.
PBMs have potential to drive drug prices down and save consumers money. They shouldn’t be allowed to do the exact opposite.
Editorials represent the views of the Boston Globe Editorial Board. Follow us @GlobeOpinion.