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Reforming PBM Practices Would Improve The Pharmacy Market


Patients, the ultimate healthcare arbiter, continue to bear the costs from the perverse incentives driving the pharmacy benefit manager (PBM) market. Because of these disincentives patients pay excessive out-of-pocket costs. Just as troubling, the misaligned incentives create impediments that dictate where patients can fill their prescriptions and which prescriptions they can take. This is not how an efficient healthcare system operates. Proposals currently under consideration by Congress, including the Delinking Revenue from Unfair Gouging Act and the Modernizing and Ensuring PBM Accountability Act, would help alleviate several of the resulting anti-market outcomes that are harming patients. Competitive well-functioning markets empower customers to choose which supplier they want to patronize and encourage suppliers to offer a diverse range of products. Applied to pharmacies, patients can often choose between a large national pharmacy chain and a small local pharmacy. Both have their advantages. Large chain pharmacies are often more convenient, provide online services, and may have the ability to provide more product options due to their scale. Large chains are better positioned to serve patients who require prescriptions when they are away from home by seamlessly transferring their prescription to the chain’s local store. Patients can, consequently, often access their prescription when they need it. Small locally owned pharmacies offer different services. Typically, a small pharmacy provides more personalized care that enables pharmacists to gain a better understanding of their patients. Pharmacists in these settings are often better positioned to tailor their counseling and advice to patients’ individual needs. These personal connections can be highly valued by some people, particularly patients with complex health issues. Additionally, the more personalized setting may foster better communication between patients and their pharmacists, which can also lead to better health outcomes. When the pharmaceutical market is functioning efficiently, patients express which suite of pharmaceutical services they value by choosing where they want to fill their prescriptions – at a large chain or a local store. Unfortunately, PBMs’ actions are distorting this market to the detriment of small pharmacies. PBMs position at the center of the drug market has enabled these middlemen to dictate unfavorable compensation terms to pharmacies. And these terms are making it increasingly difficult for small pharmacies to make ends meet. One pricing scheme long employed by PBMs charge pharmacies fees weeks or months after the drug has been dispensed – referred to as claw back fees. Thanks to claw backs, pharmacies don’t know how much revenue they have earned when a prescription is filled. That answer will come weeks or months later when the pharmacy receives the final claw back bill.

In far too many cases, these bills will push the total revenues earned by the pharmacy below its costs, meaning the pharmacy has lost money from selling the medicine. Such losses are more problematic for smaller pharmacies as well as the large pharmacy chains not connected to a PBM.

Recognizing the inequities of claw backs, a new rule set to take effect in January 2024 will require PBMs to take most of their fees at the time prescriptions are filled for Medicare patients. Unfortunately, thanks in part to the still misaligned incentives, PBMs replaced their lost claw back revenues with large cuts in their upfront payments to pharmacies.

Worsening the market outcomes, PBMs leverage their privileged position to steer the more profitable specialty medicine prescriptions toward their own specialty pharmacies. Even when the prices for medicines should be low – such as when purchasing generic medicines – the PBM-owned specialty pharmacies charge exorbitantly high prices that far exceed the manufacturer price. All these actions harm the broader pharmacy market and increase patients’ out of pocket costs.

It’s not just the pharmacy market being distorted either. A November 2023 analysis found that 30% of U.S. localities had very little PBM competition and in these concentrated local markets “a dominant PBM’s choice of preferred products” influenced “prescribing market-wide, even for patients not covered by the dominant PBM.”

In other words, PBMs not only have an undue influence over where patients can receive their medicines; they also have undue influence over which medicines patients are prescribed. Empowering middlemen rather than doctors is precisely the opposite of how a patient-centered healthcare system should work.

Addressing these problems is complicated. As the responses to the upcoming change to the Medicare rule demonstrate, it is also essential to account for the dynamic responses that can undermine the intended impacts from reforms.

Many of the reforms currently being considered by Congress will help alleviate the current adverse outcomes. The proposals will prohibit actions that are clearly distorting the current pharmacy market including steering patients toward the PBM-owned pharmacy. It also eliminates pricing practices that are misaligning the interests of PBMs with patients.

These reforms are not panaceas, but they will help rein in practices that are unnecessarily driving up patients’ out-of-pocket costs, harming small pharmacies, and exerting undue influence on the medicines patients are prescribed. As such, these are pro-market reforms that take an important step toward creating a more patient-centered healthcare system.

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