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Why are Healthcare Costs So High? Blame the Middlemen

Large employers, particularly self-insured companies, can demand a better and fairer system. They can use their contracting power to insist that their plans cover all FDA approved drugs.

When we hear about the high price of prescription drugs, the focus is usually on the list price set by pharmaceutical companies. Those list prices, however, are just the starting point for complicated negotiations between drug companies and pharmacy benefit managers (PBMs) who are middlemen between the manufacturers, insurance companies, and the patients who ultimately receive the drugs. But the function and influence of PBMs goes way beyond that of a negotiator. PBMs play an outsized role in determining patients’ access – or lack thereof – to their needed treatments.

When you hear the term “PBM,” it’s usually in reference to one of three large companies — OptumRx/United Healthcare, Express Scripts/Cigna, and CVS Caremark. They collectively process about 85% of all US prescription claims. and their profits have soared over recent years. Their profit-maximizing policies often delay, deny, or obstruct care, resulting in higher costs and less access to needed treatments for patients with cancer and other serious diseases.

The role of PBMs in drug pricing

PBMs control patients’ access to medications in multiple ways:

  • Formulary Design: PBMs decide which drugs will be included (or excluded) from a health plan’s coverage through a list known as a formulary. They use pricing tiers and other tools to steer patients and prescribing doctors toward drugs that are more profitable for the PBM. Such actions cost patients and the overall healthcare system more, and can lead to financial non-adherence (when patients stop taking their prescribed drugs due to high out-of-pocket costs). For patients, non-adherence can lead to medical complications and higher medical costs, more hospitalizations, and disastrous outcomes, including death.

  • Price Negotiations: PBMs negotiate acquisitions with drug manufacturers, often exchanging a preferred spot on a formulary for cash-back rebates on a drug’s list price. Those rebates create financial incentives for PBMs to cover brand name drugs while excluding coverage of lower-cost generics or biosimilars.

  • Pharmacy Management: PBMs manage relationships with pharmacies to further control patients’ access to treatments and what they pay out-of-pocket. In addition, they may require patients who use “specialty drugs,” which include important high-priced drugs such as chemotherapy for cancer, to use their own specialty pharmacies. These specialty pharmacies may operate solely by mail, which limits a patient’s choices and often causes delays and other problems.

Other money making schemes

Another PBM money making tool that has drawn Congressional scrutiny and draft legislation is “spread pricing.” This occurs when PBMs charge insurance companies more for a prescription drug than what they pay the pharmacy and then pocket the difference. For example, a pharmacy may be paid $50 for a drug it dispenses, while the PBM charges the insurance company $60 for the same prescription and keeps the $10 difference.

These hidden “fees,” perverse incentives such as rebates, and opaque negotiations all contribute to a system where drug prices continue to escalate, and patients bear more and more of the cost.

This year, the Federal Trade Commission (FTC) issued an open call for public comments and input on PBM practices and received more than 24,000 submissions. On June 7, 2022, the FTC announced that it was opening an inquiry into PBM business practices including their impact on access to and affordability of prescription drugs.

So, what’s a company to do?

Large employers, particularly self-insured companies, can demand a better and fairer system. They can use their contracting power to insist that their plans cover all FDA approved drugs. If they decide to limit their formulary, the drug selection and formulary tiers should be based on clinical considerations with the PBM’s drug unit cost being a secondary consideration. Manufacturer rebates should not influence tier placement or preferred status.

They can insist that utilization management tools such as prior authorization only be applied to drugs that are frequently abused, and that any PA authorizations be done electronically to prevent delays. They can instruct their PBMs to count all payments made by or on behalf of a patient toward their deductible and out-of-pocket maximum. And they can ensure that generic drugs and biosimilars are offered on the lowest cost-sharing tier.

These steps, while small, can help rein in the abusive practices that contribute so much to the increasing costs of healthcare and cause significant barriers to patients’ access to needed treatments.

About the Author: Patricia Goldsmith

Patricia J. Goldsmith is Chief Executive Officer of CancerCare. A frequent speaker at national meetings and symposia, Goldsmith was named in 2021 to Forbes Magazine’s 50 Over 50 Vision List, honoring women making an impact on society and culture. In 2022, CancerCare published a free Toolkit that helps inform the benefits package design and decision-making process and offers key considerations when plans include utilization management.


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