PBMs, the Brokers Who Control Drug Prices, Finally Get Washington’s Attention

Excerpt – The three biggest PBMs [pharmacy benefit managers] — OptumRx, CVS Caremark, and Express Scripts — control about 80% of prescription drug sales in America and are the most profitable parts of the health conglomerates in which they’re nestled. CVS Health, the fourth-largest U.S. corporation by revenue on Fortune’s list, owns CVS Caremark and the insurer Aetna; UnitedHealth Group, a close fifth, owns Optum; and Cigna, ranking 12th, owns Express Scripts. While serving as middlemen among drugmakers, insurers, and pharmacies, the three corporations also own the highest-grossing specialty drug and mail-order pharmacies. [..]

Drug manufacturers claim that exorbitant PBM demands for rebates force them to set high list prices to earn a profit. Independent pharmacists say PBMs are driving them out of business. Physicians blame them for unpredictable, clinically invalid prescribing decisions. And patients complain that PBMs’ choices drain their pocketbooks.

With PBMs driving prices, competition has had the opposite effect from what economic theory predicted Medicare patients would spend out-of-pocket on drugs, one large study showed. Over a five-year period, patients were paying 50% more for branded drugs that had competitors than for those that didn’t. [..]

The PBMs pass along most of their rebates to health plans, which will bear a larger share of patient drug costs in coming years under Medicare changes that are part of the 2022 Inflation Reduction Act. It’s likely that pressure on insurers will be passed along to PBMs and result in even more aggressive limits on physician prescription decisions, said Troyen Brennan, an adjunct Harvard University professor who was chief medical officer for CVS Health from 2008 to 2022.

Several congressional bills target drug company rebates to PBMs and what’s known as “spread pricing” — the extra money PBMs collect from insurers over what they pay pharmacies for drugs.

But those aren’t the big PBM revenue sources anymore, Brennan said. PBMs today mostly make money by owning mail-order and specialty pharmacies and from the government’s 340B program, created to help hospitals that treat a disproportionately elderly and poor population. Medicare requires drugmakers to provide big discounts to participating hospitals and the growing rosters of affiliated physician groups they own, and some of those discounts end up with PBMs.

[..] drug companies blame PBMs for high drug counter prices, PBMs blame insurers, and insurers blame the drug companies, all part of a health care system that hinges on an unspoken bargain: Make life comfortable for some — mostly the upper and middle classes — at the expense of lower-income and poorly insured people who get what they get.

PBMs’ extraction of money from patients in the name of “copayments” at the pharmacy counter “reintroduces medical underwriting” that was stripped away by the Affordable Care Act, Craig Garthwaite, a health care researcher at Northwestern’s Kellogg School of Management, told a Senate panel last year. Insurers can no longer pick and choose whom to insure, as they could before the landmark 2010 health law. But they are finding ways to make the sickest pay.

“People with expensive conditions are paying more for insurance so healthy people can pay less,” he said.

In 1967, a year before the first PBM was founded, spending on prescription drugs outside of a hospital in the U.S. totaled around $3.3 billion, compared with more than $600 billion in net payments last year. By 2005, when Medicare expanded to include coverage of outpatient drugs, government and private insurers depended on PBMs’ negotiating power to keep rising drug prices in check.

The Federal Trade Commission and Justice Department allowed the largest PBMs to gobble up competitors and merge with insurers during the Bush and Obama administrations on the grounds that bolstering their powers might rein in prices. The FTC fought state investigations of anti-competitive behavior, saying that pressure on PBMs would benefit consumers.

The FTC under President Joe Biden has switched course, at least partly because of the arrival of Chair Lina Khan, a vigorous proponent of antitrust policy who launched an investigation of the PBMs last June.

[..] PBMs have shown themselves adept at finding ways around regulation. A federal rule scheduled to take effect next year would curtail PBM “clawbacks” on independent pharmacies. But PBM contracts sent out to pharmacies in recent weeks get around that by lowering reimbursement fees and putting a percentage of their payments to pharmacies into a kind of escrow, said Douglas Hoey, CEO of the National Community Pharmacists Association.

When the Trump administration considered banning brand-name drug rebates in 2017, PBMs set up companies in Ireland and Switzerland to take over the negotiations and purchases. Doing so offered a tax advantage and allowed the PBMs to avoid scrutiny of the quantity and nature of those deals. Recently, Express Scripts set up another company to purchase generic drugs, in the Cayman Islands.

And PBMs appear adept at moving money from one pocket to another. “Yesterday’s rebates are today’s fees and potentially tomorrow’s something else,” said John O’Brien, CEO of the pharmaceutical industry-funded research group, the National Pharmaceutical Council. [..]

“I predict that any health insurer that doesn’t have a PBM is going to disappear in 10 years,” said Neeraj Sood, a professor at the University of Southern California Sol Price School of Public Policy. “Otherwise, there is no way to compete with the big three.”

Full article, A Allen, KFF Health News, 2023.5.11