Amid rising frustrations over healthcare and medication costs, President Trump and Health and Human Services Secretary Robert F. Kennedy Jr. promise to lower drug prices by targeting pharmaceutical benefit managers, or PBMs.
With Big Pharma backing and a Federal Trade Commission lawsuit against the three biggest PBMs for inflating insulin prices, bipartisan pressure for reform is mounting. PBMs make an easy target. They determine which drugs are covered by health plans, and the largest ones are vertically integrated with major insurers.
Nevertheless, popular PBM reforms would undermine the ability of PBMs to negotiate lower drug prices, fail to address the fundamental drivers of costs, and further stifle competitive practices that would otherwise increase choice and lower prices.
Americans spend nearly three times what other countries’ citizens pay per capita for drugs. This is primarily because America’s most significant drug purchaser — the Centers for Medicare and Medicaid Services (CMS) — pays for most drugs.
In countries like Australia, public insurers negotiate the prices of patented drugs with drugmakers, using their bulk purchasing power to lower costs. By contrast, and except for some Medicare Part D drugs, CMS is legally required to pay the average (Medicare) or lowest (most Medicaid) private market price for the drugs.
This incentivizes drugmakers to raise the prices they charge private insurers. Although higher prices result in fewer drugs being sold to private health plans, drugmakers make substantial gains from the large volume of CMS purchases since they get this higher price for every drug CMS buys. American patients and taxpayers pay more.
CMS coverage for an aging population significantly grows the fiscal deficit, and drugs account for 9 percent of healthcare spending. High revenues are crucial for American pharmaceutical research and development, creating countless cures that wouldn’t otherwise exist and benefiting patients globally. However, efforts to get other countries to help fund this vital research and development through legislation and trade talks haven’t succeeded.
Like large public insurers, PBMs negotiate lower costs for private health plans by pooling drug purchases. Drugmakers that produce competing products vie for favorable placement in health plans’ drug coverage formularies, and they do this by offering PBMs rebates that are typically a percentage of the drug’s “list price” — which is set by the drugmakers. After deducting commissions, PBMs pass these rebates to their clients, helping subsidize (and thus lower) insurance premiums.
Drugmakers argue that PBMs or insurers pocket a large share of rebates, and they’re forced to raise drugs’ list prices to give PBMs larger rebates for securing favorable formulary placements. They argue that PBMs steer patients to more expensive drugs, letting them claim larger commissions on rebates.
This may sometimes hold true as PBM contracts typically aren’t public. Some PBMs have been held liable for price-fixing. Others have paid millions to settle claims that they didn’t pass on rebates to clients. However, industry studies find that, at least on average, PBMs pass on most of their rebates to clients, save consumers money, incentivize cheaper generics instead of branded drugs, and that rebated drugs’ prices haven’t grown significantly faster than non-rebated ones.
Forcing PBMs to pass all rebates to clients would destroy incentives to negotiate larger discounts and likely raise premiums. Even if it didn’t, cutting PBM commissions to zero would reduce a $100 drug’s price to only $95. The Congressional Budget Office similarly finds that forcing PBMs to pass rebates to consumers at the point-of-sale would increase costs to Medicare Part D plans by $170 billion and state and Medicaid-sponsored private plans by $7 billion over 10 years.
Thus two recent FTC reports accusing PBMs of inflating prices of a narrow pool of lifesaving drugs raise red flags but don’t paint the full picture. They don’t say whether these deals benefited patients through lower premiums or whether they resulted in cross-subsidies for other medications. Similarly, the FTC lawsuit against major PBMs claims thatPBM rebates for some insulin products are an illegal “unfair method of competition” despite making no argument that they violate the spirit, letter or public policy of the Sherman or Clayton antitrust acts, as needed for the claim to succeed, and despite potential countervailing benefits to patients. Any reform that deters or limits PBMs from negotiating prices is likely to raise costs or reduce choice for health plans and covered patients.
Policymakers can benefit patients and lower costs while breaking the health insurer oligopoly through pro-competition reforms. Reducing restrictions on interstate insurance purchases, repealing tax penalties that force dependence on employer-sponsored insurance, and culling drug import restrictions would all help.
Wrongdoers should be investigated and prosecuted with targeted lawsuits. However, blanket, industrywide restrictions on negotiation practices that benefit patients and health plans would serve vested interests while backfiring on those they’re meant to help.
Trump and RFK Jr. should think twice before supporting such reforms.