PBM Opponents are Worried about their Own Bottom Lines

It is time to add the Robinson-Patman Act (RPA) to the list of laws passed by the federal government that solved one problem only to create another – albeit almost a century later, in a very specific, yet vitally important sector.

Robinson-Patman, a law enacted in the Great Depression years of the 1930s, requires manufacturers to charge the same price for a product to all buyers regardless of the quantity bought and prohibits large manufacturers from discriminating against small businesses by charging them higher prices than their larger customers.

This law has now become a crucial part of the debate on how to lower prescription drug prices and has ensnared Pharmacy Benefit Managers (PBM) and the business model they utilize.

PBMs negotiate drug prices on behalf of insurers, unions, governments, and large companies that self-insure their workers. By accumulating a modicum of market power, they are able to negotiate with the big pharmaceutical companies to obtain discounts for their drugs. Since the pharmaceutical companies are effectively monopolists for many of the drugs they sell by dint of their patents, they can charge whatever the market will bear.

PBMs do not negotiate lower prices, as that would violate Robinson-Patman; instead, they negotiate a rebate from the drug manufacturer, which PBMs share with their clients, which allows them to reduce the cost of providing coverage for their members.

Those who oppose PBMs -- most notably the pharmaceutical industry -- claim that PBMs are unproductive middlemen and that they keep most of these rebates. Therefore, they conclude that eliminating them altogether would result in the PBM’s revenues going to healthcare plans in the form of lower drug costs.

But that assertion simply doesn’t hold water: A Pew Trust study found that PBMs returned 91% of pharmaceutical manufacturer rebates in 2016. A recent Bipartisan Policy Center study estimated that PBMs retained less than 5% of net revenues for 2018. The study also observed that the 5% retained by PBMs was lower than the percentage of retained revenues of other entities in the pharmaceutical drug supply chain such as pharmacists or wholesalers -- two other opponents of PBMs. Pharmacists object to PBMs because they often implement the direct delivery of drugs to the patients’ houses instead of having them pick them up at a pharmacy, which dramatically improves drug adherence and health outcomes but at the expense of their market share.

Lately, there has been a profusion of proposed legislation at the state and federal levels to either make these rebates illegal or require that the entire rebate be passed through to the employer. There is a simple solution to objections to rebates: Congress could exempt PBMs from the Robinson-Patman Act and allow them to directly negotiate price discounts. Doing such a thing would obviate the rebate conundrum and inject more transparency into the drug market, which would allow us to directly observe the value that PBMs bring to the market.

PBMs could receive a proportion of their savings as their compensation -- which is how it currently works with rebates. If they are unable to obtain significant discounts from the list price then their compensation will be miniscule, and the ostensible middleman “wedge” will be all but nonexistent.

PBMs continue to be on the hot seat in Washington as both the Biden Administration and members of Congress from both political parties look for ways to lower prescription drug costs. The simple reality is that neutering PBMs won’t accomplish anything; changing Robinson-Patman would serve to remove the bogeyman that Pharma and the independent pharmacists have created and force them -- and the government -- to accept the simple reality that they oppose PBMs because they hurt their own bottom line.

Hassan Tyler is an Analyst for Capital Policy Analytics. Hassan is a former staffer for Senator Joseph Lieberman on Capitol Hill. He has an M.A. from American University in International Economic Relations, and a B.S. in Economics from Winthrop University.