Debate Over Pharmacy Benefit Managers Increase Concerns in Low Income Communities

By Ike Brannonbr>

There are no simple tricks available to reduce the cost of prescription drugs. And one that various legislators have recently put forth – constraining the actions of pharmaceutical benefit managers – won’t save a penny for patients, insurers, or the government – and certainly not for Louisiana residents.

Pharmacy benefit managers (PBMs), manage the drug formularies for a variety of entities that ultimately provide health insurance for their members – such as state and local governments (along with Medicare), large employers, unions, and other healthcare payers. They negotiate drug prices on behalf of their clients with the pharmaceutical companies, and they are able to obtain lower prices than the payers could achieve themselves because they have more market power. A PBM will typically represent numerous entities that purchase pharmaceuticals in a negotiation.

Louisiana has been a pioneer with regard to PBMs. It requires all Managed Care Organizations that help to provide services to Medicaid in the state to use the same PBM, which gives the state more leverage in obtaining greater discounts.

PBMs–in Louisiana and elsewhere–have also been successful in implementing various reforms that improve efficiencies for their clients, with the most successful one being the direct delivery of drugs to the patient.

However, a few members of Congress—and both parties are complicit in the false notion that PBMs are little more than “middlemen” that add nothing of value to the negotiation process and any revenue they collect is, by definition, wasteful. The notion that reducing or eliminating their profits—or abolishing PBM’s altogether—would produce pure cost savings for the healthcare system, their reason is utter nonsense: The push to neuter pharmacy benefit managers has been largely driven by the pharmaceutical industry—which doesn’t like having to heavily discount their blockbuster drugs—and the independent pharmacists, who don’t like that the direct delivery of drugs often cuts them out of the loop.

The debate over PBSs has particular resonance in low-income communities that often struggle under the weight of skyrocketing health care costs. In many cases, PBMs make essential medications more affordable for individuals in need of critically important medications. For instance, Medicaid, the federal insurance program for the poor that disproportionately serves low-income Black populations, has used PBMs to lower the costs for life-saving medications like blood pressure or diabetes drugs.

The latest piece of legislation designed to undermine the efficacy of PBMs would eliminate the ability of PBMs to base their revenue from an insurer on the amount of savings it generates. Right now insurers can either negotiate a flat fee with their PBMs ex-ante or else pay them a proportion of whatever discounts it obtains. Obviously, the latter arrangement incentivizes a PBM to obtain the largest possible discount.

Of course, that’s precisely what the pharmaceutical companies and independent pharmacists want to stop, but imposing this would be, in essence, an enormous, multi-billion-dollar experiment in the drug market. There is no similar price regulation in any other market to serve as an analogy. What’s more, the data suggest that PBM margins have been constant in the past few years, so it’s hard to infer that they have contributed to healthcare inflation recently.

It’s also worth noting that the GOP has previously been loath to interfere with imposing price regulations on the insurance industry, which this would clearly do. Despite protestations to the contrary, the PBM market is fairly robust: There are numerous companies in the market and insurers can change PBMs fairly easily.

The notion that drug prices are high because middlemen are somehow extracting all of the profits flies in the face of the fact that drug companies are making money hand over fist these days—and with good reason, as the sector, with all its faults, has produced numerous blockbuster drugs in the past few years that have delivered actual cures for endemic health problems that have bedeviled our society for generations.

I fully accept that today’s Republican Party no longer gives credence to free markets and competition. But intervening in the pharmaceutical market on the dubious notion that constraining the middleman will reduce prices shouldn’t hold water with its members regardless of the party’s ethos.

The pharmaceutical market may be a long way from an unfettered market, but tying the hands of PBMs won’t get us closer to a free market outcome of lower prices and greater customer choice, nor would it help Louisianans get cheaper health care.

Ike Brannon is a senior fellow at the Jack Kemp Foundation