Why reforming PBMs is the key to lowering drug costs

The Orange County Register

Author: Wayne Winegarden

If lawmakers want to make pharmaceuticals more affordable, they should look past populist policies like price controls that will only make matters worse and set their sights on reforming the Pharmacy Benefit Manager market.

PBMs manage the drug benefits for insurers and negotiate discounts with drug manufacturers. You probably use one every time you go to the pharmacy to get your medications refilled and don’t even realize it. The top three PBMs, which process about 80% of all prescription claims, are health conglomerates that include major insurance companies.

PBMs argue that their negotiations lower drug costs, which logically makes sense but fails to account for an essential question: whose costs? When it comes to the drug market, this distinction is everything.

When PBMs negotiate discounts with manufacturers, they consider the resulting net prices to be proprietary information and keep consumers in the dark. Consequently, the actual prices paid for medicines are not widely known. Since the actual transaction prices are unknown, discounts that would benefit patients in a properly functioning market are actually raising patients’ out-of-pocket spending.

Such a bizarre outcome occurs because patients’ costs are tied to the only visible price – the drugs’ list prices. But these prices exclude the negotiated discounts. As a result, a patient whose health insurance requires a 20% co-insurance payment will spend $20 for a drug with a list price of $100. However, the actual drug cost is not $100. On average, total rebates and discounts for a drug are around 50% of the list price. So, the total cost of the drug is really $50, not $100.

Consequently, patients are paying a 40% co-insurance rate on a drug’s net costs ($50) rather than the expected 20% rate. Insurers benefit by only needing to pay $30. Several adverse outcomes result.

This system inequitably shifts some of the costs that should be covered by insurers to patients that require expensive medicines. As shown above, patients end up paying twice as much as they should.

Even worse, the dollar costs shifted to patients have been growing... Continue Reading