The nation’s attention remains fixed on pharmacy benefit managers. Following a series of House Oversight Committee meetings on PBMs role in rising drug costs and an FTC investigation into anti-competitive business practices at PBMs, a growing number of states are litigating PBMs for price-fixing. And just last week, the Arkansas Insurance Department Commission penalized four PBMs millions of dollars for paying pharmacies below the national average drug acquisition cost, an illegal action according to state law.
But how do these lawsuits and allegations affect everyday Americans, many of whom have never heard of PBMs? In short: significantly, even if they don’t know it. As I’ve noted previously, pharmacy benefit managers are middlemen that negotiate between pharmacies, insurers, drug manufacturers and employers/plan sponsors. They also manage health plan formularies, negotiating to determine where drugs are placed and how much an insurer will pay for each medication, ultimately influencing the availability and affordability of patient treatment. Through a variety of tactics I explained in detail in a previous column–including rebates, administrative fees and formulary ties–PBMs have contributed to rising healthcare costs and limited patients’ control over their healthcare decisions.
It hasn’t always been this way, however. When pharmacy benefit managers were first established, their services helped American consumers. They brought down the cost of pharmaceutical products by steering doctors to low-cost generic versions of branded drugs, helping the market transition from a reliance on branded medications to more affordable, equally effective alternatives.
But while PBMs still leverage this history to market their products and defend themselves against legal challenges, they’ve changed their business model in ways that hurt American consumers and drive up prices for everyone. As the PBM market has become increasingly consolidated, with just three PBMs handling nearly 80% of all prescription drug claims in the United States, PBMs have taken advantage of their dominant position in the pharmaceutical supply chain.
Today, PBMs operate largely behind the scenes. While almost every American is familiar with hospitals, health insurers, drug companies and pharmacies, very few have heard of pharmacy benefit managers, at least until their recent appearance in the news. Yet their practices drive up costs for consumers and restrict patient choice.
PBMs have incentives that conflict with the best interests of patients and employers. They negotiate with pharmaceutical manufacturers to secure rebates for including drugs on a health plan’s formulary–a list of covered drugs that the insurer will reimburse. These rebates are typically based on agreed upon list prices: higher prices lead to larger ‘discounts’ and rebates. As a result, PBMs have a vested interest in more expensive drugs that give them bigger rebates, rather than opting for more affordable alternatives. This pricing strategy, based on artificially inflated prices, leads to higher out-of-pocket co-pays for patients.
Additionally, PBMs restrict patient choice in a variety of ways. By structuring a health plan formulary through negotiations with insurers and drug manufacturers, PBMs place drugs on different tiers or exclude them from coverage altogether. By taking them off the formulary, they make some drugs inaccessible to patients, even when they are the best available treatment option.
Another way they restrict access is by directing patients towards their affiliated pharmacies. While patients may pay less for a given medication if they get a script filled at these pharmacies, they may not be as convenient. More importantly, PBMs sometimes restrict reimbursement coverage altogether to those pharmacy chains with in-network status to pharmacy chains owned by their parent corporations. For patients, these practices mean higher costs, limited choices and an inability to access medications from non-affiliated pharmacies.
Lastly, PBMs lack transparency. The labyrinthine world of PBM operations is designed to obfuscate rather than illuminate, leaving patients, employers and even regulators in the dark about true drug costs. While consumers know the prices they will need to pay for their medications, the lack of clarity around how these prices are established–and how much of the rebate PBMs keep–fuels frustration and mistrust. The issue isn’t just that PBMs operate secretively–it’s that this opacity makes it difficult to assess whether their role justifies the substantial share they take from the drug pricing pie.
While it’s easy to point the finger at industry giants like PBM behemoths, what’s really needed is an industry-wide overhaul. As I explain in my book, Bringing Value to Healthcare, PBMs don’t operate in a vacuum. Lawsuits represent important steps in curtailing egregious behavior, but without systemic solutions, they run the risk of being more hype than substance, failing to address needed changes in the business model.
PBMs are an example of the issues that have plagued the healthcare ecosystem for decades: opaque practices, consolidation, payment divorced from outcomes, conflicts of interest, misaligned incentives, limited patient decision making, high costs and little to no accountability. A better model would be characterized by transparency in cost and quality, payment tied to outcomes that matter to patient-consumers, along with accountability for care across the continuum.
These investigations and lawsuits should not be seen as the end of the journey but an important step along the way to that new model. The national scrutiny we are seeing today needs to translate to other parts of the healthcare ecosystem and lead to a thorough examination of how the pieces need to be put together differently. And it’s past time that patients get a center seat at the table.
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