New legislation aimed at lowering drug prices could slam American patients and taxpayers with a multibillion-dollar bill instead. The “Delinking Revenue from Unfair Gouging” (DRUG) Act targets Pharmaceutical Benefit Managers (PBMs), the middlemen who negotiate drug prices with drugmakers and pharmacies on behalf of public and private insurance plans, and who determine which drugs the plans will cover.
Introduced by Rep. Rep. Mariannette Miller-Meeks (R-IA), it would prevent PBMs from charging plan sponsors fees based on the rebates on drug prices they negotiate with drugmakers, forcing them to charge a flat rate for their services instead. Miller-Meeks argues that the rebate-based fee model incentivizes drugmakers to inflate the list prices of drugs to provide larger rebates to PBMs as rebates are typically calculated as a percentage of a drug’s list price. This, they argue, drives PBMs to choose expensive drugs for coverage over cheaper alternatives to increase rebates and thus their own profits while raising costs for plans and patients.
Contrary to the claims, preventing health plans, drugmakers and their intermediaries from negotiating prices freely would harm competition and likely raise costs for the plans and their clients. Some PBMs already offer a flat fee-for-service model that plan sponsors are free to choose, yet most still choose the rebate model. It’s easy to see why.
PBMs use the bulk-buying power of pooling patients across scores of health plans to negotiate discounts and rebates from drugmakers and pharmacies. Tying their compensation directly to these rebates incentivizes them to negotiate the biggest rebates possible, thereby offsetting coverage costs for plans and thus premiums for patients. Drugmakers vying for coveted plan formulary listings for their drugs are also incentivized to compete and deliver the largest rebates possible. By contrast, forcing PBMs to charge a flat periodic fee regardless of the savings they negotiate eliminates these incentives, leading to less savings. Plan sponsors who aren’t happy with their PBM could switch to another. Yet even this PBM may face the same reduced incentive to negotiate.
PBMs often encourage the use of generic drugs and evidence of PBMs steering patients to more expensive branded drugs is mixed. Yet even if a PBM steers patients to a more expensive branded drug to address a particular condition, the larger rebate offsets coverage costs across the entire plan. PBMs pass on most of the rebates they negotiate to plan sponsors. The Congressional Budget Office found that forcing them to pass rebates directly to patients at the point-of-sale instead would likely raise costs of U.S. Medicare by $170 billion and Medicaid by $7 billion over 10 years. Individual PBMs that violate contracts by failing to pass rebates to plan sponsors have successfully been sued for this, further making the need for blanket restrictions on PBM negotiation models questionable.
Eroding PBM compensation would also reduce competition by deterring new PBMs from entering the market, further entrenching the market share of the largest incumbents, CVS Caremark, Express Scripts and Optum Rx. These PBMs cover over 80% of U.S. drug prescriptions and form part of large, vertically-integrated conglomerates with their own pharmacy chains and health plans. By spreading costs over a larger entity, they can more easily bear changes in payment structure and other regulatory burdens than independent players. This would further increase consolidation in the healthcare sector, leading to potentially anti-competitive outcomes. For instance, it would make it easier for large PBMs to charge a higher fee relative to the value they create without losing business to new competitors.
Unlike independent PBMs, these conglomerates would retain the incentive to negotiate aggressively and maximize savings for their own in-house plans even under a flat fee model. This would further drive employers to conglomerate health insurers to benefit from these savings due to reduced competition from independent PBMs. Reduced PBM competition could ultimately lead to drugmakers raising prices, defeating the law’s purpose while enriching pharma at the expense of patients who’ll bear higher premiums and out-of-pocket costs.
The link between higher rebates and list prices is also questionable. A 2020 study found a correlation between list price and rebate volume increase, but did not establish a causal link and didn’t distinguish PBM-negotiated rebates from those mandated by statute for certain public health plans. More recent analysis finds that the list prices of branded rebated drugs have grown at roughly the same rate as branded non-rebated drugs, and that net prices of rebated branded drugs decreased between 2018 and 2021 while they increased for non-rebated branded drugs. These findings further suggest that allowing PBMs to levy fees based on negotiated rebates isn’t the cause of high drug prices.
Policymakers can boost competition and reduce healthcare costs by scrapping tax penalties that push people into employer-sponsored insurance, reducing drug import restrictions and allowing interstate insurance purchases. Preventing parties in the supply chain from aggressively negotiating prices would benefit vested interests, not patients.
