Congress is in the process of negotiating a set of bipartisan health policies, including pharmacy benefit manager (PBM) reform. On the table for inclusion are two policies that will provide immediate relief for patients in the form of reduced out-of-pocket costs for drugs: delinking drug prices from PBM income and requiring PBMs to pass through the discounts, rebates and other price concessions they obtain from drug companies. PBM reform wouldn’t be complete without both reforms, as each is critically important in its own right.

Delinking will correct the perverse incentive behind seemingly absurd formulary decisions, like preferred coverage of a $10,000 brand drug while its $450 generic is not covered at all. Such a decision is rational from the PBM’s perspective because a $10,000 medication presents much higher income potential for the PBM, who negotiates percentage-based price concessions off that price point. 

When the group of medications is priced the same, this may not make much of a difference. Still, for medications with large price disparities, the one with the highest list price is the most attractive to the PBM. After all, even 1 percent of 10,000 is far better than 1 percent of 450. This is happening in Medicare Part D: a study found that the largest PBMs and insurers were driving Medicare beneficiaries who needed a drug for multiple sclerosis to the $8,275 brand rather than the $184 generic.

Since list prices seem mostly fictional, one might wonder whether any of this even matters. It does because patient cost-sharing is often tied to the list price, which leaves patients holding the bag for this perverse incentive. Delinking would stop this by severing the link between a PBM’s income and the price of a drug and moving PBMs to flat-fee compensation instead. As stewards of taxpayer-funded healthcare programs, lawmakers must correct perverse incentives that increase costs and reduce access for beneficiaries of those programs.

A pass-through is similarly essential. PBMs retain much of the price concessions they extract, which can be true even when their customers contractually require full pass-throughs. That came to light through litigations brought by different states against the PBMs who managed their state programs’ drug benefits. In Ohio, for example, the state auditor found in 2018 that a full 31 percent of the state’s generic drug spend was retained by PBMs. Subsequent litigation by states about this issue has resulted in large settlements. States should not have to file litigation to receive what was contractually due to them and their taxpayers. Similarly, the inspector general’s office in the Department of Health and Human Services has observed  that “many rebates do not flow through to consumers at the pharmacy counters.”

To obfuscate the money streams even more, the large PBMs have recently created subsidiary entities called “rebate aggregators,” some of which are organized offshore. If a PBM has such an affiliated entity, it can claim that the PBM passes through 100 percent of the rebates it receives without clarifying that most of the price concessions it negotiates accrue to its aggregator.

The lengths to which the PBM industry will go to avoid transparency as to the ultimate landing place of price concession dollars indicates who benefits from this system. Although delinking price concessions from PBM income will correct the incentive causing PBMs to prefer drugs with high list prices, negotiating discounts and constructing formularies will remain critical functions of a PBM, which means patients will still need help to access the price concessions negotiated by PBMs. For that reason, both reforms are critical.

As our patients and many healthcare colleagues know, the PBM industry is in dire need of reform. Delinking drug prices from PBM income and requiring PBMs to pass through discounts, rebates and other price concessions are critical steps in the right direction. 

These reforms would reduce out-of-pocket costs for patients, improve access to affordable medications, and create a more fair and transparent system for all stakeholders. Congress should act swiftly to pass these reforms into law and help ensure everyone has access to the prescription drugs they need at a price they can afford.