Time to Rein in the Drug-Industry Middlemen Exploiting Patients

Last month, lawmakers missed a big chance to lower the cost of prescription medicine.

Despite including a host of new drug-pricing measures in the Inflation Reduction Act (IRA), legislators did almost nothing to crack down on some of the worst actors in the entire healthcare system — the "pharmacy benefit managers" and other supply-chain intermediaries who routinely raise drug costs and deny consumers access to life saving drugs.

Fortunately, there's no reason they can't act when they return to Washington this month.

Controlling drug costs is a necessary concern and the IRA tries to achieve this by imposing price controls on some drugs purchased by Medicare. But this is far less than a half a loaf solution. It doesn't control costs in commercial markets and, more importantly, does nothing to address drug market intermediaries that are inflating the cost of drugs.

It's easy to target drug manufacturers. But in the past several years we have come to realize that drug middlemen, known as pharmacy benefit managers, are actively inflating the cost of drugs.

These giant corporations — whose operations most Americans know nothing about — have prospered for more than a decade in an environment almost wholly devoid of regulatory attention, fleecing the system for billions of dollars a year.

PBMs arose to perform a specific task: Negotiate with drug makers on behalf of insurance companies over the price of medicine. In theory, PBMs should be motivated to drive hard bargains, and thus save consumers money.

But in practice, the top three PBMs each own, or are owned by, the country's three largest insurance companies — and also own their own pharmacies. They thus have a vested interest in driving traffic to their other lines of business. That squashes, rather than encourages competition, increasing the price of drugs for consumers.

Moreover, the sheer market power of the big three — CVS Caremark, Optum Rx, and Express Scripts, with a combined market share greater than 80% — has forced smaller community pharmacies into accepting below-cost reimbursement, and put many out of business. 

PBMs are also hurting patients in more direct ways.

Drug companies provide PBMs rebates in exchange for PBMs including those medicines on insurance-plan formularies.

The problem is that while PBMs were originally formed to act as honest brokers and pass these savings on, today, they keep a significant portion of the funds for themselves — with no legal limit. Moreover, their profits rise when drug prices are higher. So they have incentive to seek steeper, not lower, prices.

That creates an incentive for PBMs to demand higher and higher rebates to pad their own bottom lines, which puts upward pressure on list prices. In essence, PBMs behave like realtors who show clients overpriced houses just so they can get higher commissions.

But it's not just a question of higher prices. Often PBMs exclude drugs that are more effective in treating critical diseases or they exclude lower cost generics. Other times they impose difficult step therapy programs which require patients to continue to take drugs that do not work, before they can get the more efficacious drug — disfavored because it doesn't offer a higher rebate.

Making matters worse, the discount negotiations are cloaked in secrecy, and PBMs have fought hard against efforts to require transparency. To pick one egregious example, they routinely impose "gag clauses" that prevent pharmacists from telling patients about lower-cost alternatives to the drugs in their plans. In other words, they contractually force healthcare providers not to act in patients' best interest — and have so far gotten away with it.

Unsurprisingly, consumers and community pharmacies are up in arms. Over 24,000 consumers and community pharmacists recently filed comments with the Federal Trade Commission asking for a thorough study of PBM practices.

Concern over healthcare costs animated much of the debate that led to passage of the IRA. Yet pharmacy benefit managers emerged from the process virtually unscathed. Hopefully that changes when lawmakers return to Washington from their August recess.

David Balto is a public interest antitrust attorney and is the former Policy Director of the Federal Trade Commission.