Sen. Sheldon Whitehouse (D-R.I.) captured a troubling phenomenon in the world of pharmaceutical drugs during a Senate Finance Committee hearing Tuesday:
“I stand in awe of the pharmaceutical industry’s jujitsu magic to have gotten their prime antagonists to become the focus of the problem,” Whitehouse said.
Those antagonists are pharmacy benefit managers (PBMs), the much-maligned middlemen in the drug-supply industry, whose executives appeared before the committee to testify on the rising costs of pharmaceutical drugs. For years, these companies have been the target of fierce accusations — especially from drug manufacturers — that they are the driving force behind ever-growing drug costs. Recently, the Trump administration has joined the assault.
But Tuesday’s hearing left the companies relatively unscathed. So it seems that legislators aren’t prepared to make PBMs out to be the grand villains of our drug pricing crisis. That’s probably a good thing.
That’s not to say PBMs don’t deserve robust scrutiny. In many cases, they have forced unwitting consumers to pay ridiculously high co-pays for drugs, including generics. In fact, PBMs have often driven up the cost of generic drugs through a tactic known as spread pricing, whereby they charge their clients far more than what they pay pharmacies for a drug, pocketing the difference. Lawmakers criticized them for all of this in Tuesday’s hearing.
But remember that of all the money spent on pharmaceutical drugs in the United States, well more than half goes to manufacturers — the companies responsible for setting the exorbitant list prices and extracting massive profits from the industry. Pharmacy benefit managers, on the other hand, get less than 5 percent.
Congressional overseers should scrutinize the players in proportion to the power they wield in the industry. To promote competition in the pharmaceutical industry, we’ll need a holistic approach that holds everyone accountable.
To understand how PBMs work, imagine a grocery store that carries a bunch of different cereal brands. To buy the cereal from manufacturers, a grocery store contracts with another company to negotiate prices. The top brand-name company makes a deal to sell its cereal to the grocer at a discount, in exchange for better placement of its products on the store’s shelves. And the middleman gets to keep a portion of the discount.
This is essentially how PBMs operate, but instead of negotiating better shelf treatment for brand-name cereal, they negotiate better coverage of pharmaceuticals in insurance plans. Insurance companies have their own “shelves” for how they cover drugs: They’re called tiers. The lower the tier, the less consumers have to pay in the form of a co-pay. PBMs help negotiate which drugs fall in which tier. Sometimes, that involves drug manufacturers paying for better placement in the insurance plans.
Ordinary people might consider such a payment a bribe or a kickback. The health industry calls it a “rebate,” and it’s entirely legal, although the Trump administration has proposed doing away with the rebates to PBMs entirely.
PBMs argue that rebates aren’t a problem because they allow plans to offer drugs at a discount to customers, sometimes making brand-name drugs more affordable than generic competitors. No doubt, PBMs have in many cases saved patients a lot of money.
What’s wrong is the lack of transparency. PBMs claim that most of their rebates are carried over to the consumer in the form of lower prices. But we don’t know by how much, nor do we know how much of the rebates PBMs pocket for themselves. The companies do not share that information with the public, and have passionately resisted reforms that would force them to do so, as they say it could hurt their ability to negotiate rebates in the future.
That makes PBMs the perfect scapegoat for drugmakers. Manufacturers can claim that rebates are driving costs with little likelihood that anyone will be able to prove them right or wrong. In fact, this is exactly what happened when Big Pharma executives appeared before the Senate Finance Committee in February.
But it’s important to recognize that the dynamic between manufacturers and PBMs is transactional. Drugmakers may complain about rebates, but in paying for better placement in insurance plans, they can undercut the competition and guarantee a larger market for their products. That’s exactly what manufacturers want.
It’s just one of many anti-competitive tactics that manufacturers use to protect their market share. Manufacturers have also been accused of preventing competitors from accessing samples of their products, which are necessary in getting a generic approved by the Food and Drug Administration. They have also become notoriously good at tweaking their products just as their patent is about to expire. And let’s not forget the “pay-for-delay” agreements that manufacturers have created with other companies to thwart competition.
Clearly, there are bad actors across the system in need of reform, and our policy response should reflect all of them. President Trump, for his part, has made much noise about going after manufacturers, and his administration has even proposed establishing an “international pricing index” for some drugs covered by Medicare — though the proposal faces stiff opposition. In any case, if we’re going to follow through in holding pharmacy benefit managers accountable, we should do the same with the rest of the industry and make sure no one gets off the hook.