Imagine you’re in charge of purchasing desks for your local school system. Your main negotiating leverage is that you can freeze out desk makers who won’t give the school system a good price. In negotiations with DeskMaker, you ask for a percentage off their retail prices in exchange for their becoming the school system’s preferred desk supplier.
Win-win? Not so fast. There’s a slight wrinkle, which is that the school system will still be billed the full retail price by DeskMaker because whatever discount you negotiate off the top goes into your pocket. Before long, you draw an obvious conclusion: because the discounts are percentage-based, desks with higher retail prices result in more money in your pocket.
If that sounds illegal, it may surprise you to learn it’s not too far off from how prescription drugs are priced in our country. It explains seemingly irrational formulary decisions, like preferred coverage of a $10,000 brand drug while its $450 generic is not covered at all. Such decisions become perfectly rational if we keep in mind that the $10,000 brand generates much higher income for the very entity tasked with keeping drug costs low: pharmacy benefit managers (PBMs).
Prescription drugs are placed on tiers in a formulary by the insurer and its PBM. Tier placement decisions are based on the contracts between PBMs and drug companies. Formulary placement can make or break a drug’s market access because a drug that is relegated to a specialty tier will be subject to such burdensome utilization management and high cost-sharing that most patients will never see it. That is why the drug company is willing to pay through the nose in exchange for competitive formulary placement — a payment that often takes the form of a percentage-based “concession” off the list price of the drug.
Just like the desks from our example, the higher the retail price of a drug, the greater its discount potential. In this context, the word “discount” is one of the many verbal sleights-of-hand feeding the confusion that enables this system. To the PBM, a discount by any other name smells just as sweet. Regardless of whether these monies are called a discount, a rebate, a price concession, a fee, or a purple dinosaur, they equal revenue flowing into the PBM. Ideally, PBMs would use these funds to lower out-of-pocket costs for patients in need of expensive medications, but since the money is absorbed by the PBM, there’s no way to know where it ends up. The industry seems hesitant to disclose hard data on this point.
What data we do have often comes from public filings mandated for purposes of stock trading, and it’s instructive. Even in the dizzying world of drug pricing, PBMs stand out for their annual incomes. In 2022, OptumRx — one of the “Big Three” PBMs — raked in almost $100 billion. That same year, its parent company, which is a major insurer, made a cool $324 billion. Making overwhelming amounts of money is not an indictment in and of itself, but something is wrong with the fact that these numbers dwarf the revenues of even the largest pharmaceutical companies — the ones actually making the drugs.
Fortunately, the Congress has sprung into action to reform this unsustainable system. On both sides of the aisle, members of Congress have conducted inquiries, introduced bills, and advanced legislation to bring relief to patients. One of the most critical reforms under consideration is the concept of “delinking,” which would sever the link between a PBM’s income and the price of a drug, and move PBMs to flat-fee compensation instead.
The PBM industry’s latest advocacy campaign targets Republican lawmakers with the argument that delinking amounts to government interference in a free market. But our drug pricing market is not free if we agree that a free market is one in which prices are determined by unrestricted competition between privately held entities. In our current system, drug list prices are fictional and government programs pick up large portions of the tab.
In fact, the PBM industry has long dodged reform precisely because it threatens to increase government spending on subsidies for the premiums charged by insurers, which are part of the same corporate entities as the big PBMs. There’s an irony to relying on government spending projections to protect one’s “free” enterprise. By definition, a government-subsidized market is not a free one.
Republicans and Democrats share an interest in ensuring that taxpayer-funded programs like Medicare and its beneficiaries are not being fleeced. As stewards of these programs, lawmakers have an obligation to correct perverse incentives that encourage fleecing to occur, and Congress plans to do just that. Recently, the Senate Finance Committee unanimously advanced several PBM reform policies, including a limited delinking policy, while a key House committee will soon consider legislation to delink pricing from PBM income in Medicare Part D.
Healthy free markets benefit the consumer. If we believe the patient should be considered the consumer in the prescription drug market, then our pharmaceutical pricing policies must reflect that fact. To help ensure that they do, Congress must enact a strong delinking policy.
Robert Levin is the president of the Alliance for Transparent and Affordable Prescriptions. He wrote this for InsideSources.com.
Angus Worthing is the vice president of ATAP Action Network. He wrote this for InsideSources.com.