While it has created more innovative medicine than anything in history, the American pharmaceutical industry is a byzantine, expensive system that's easy to criticize and easier to misrepresent. Total spending in 2020 on prescription drugs in the U.S. was almost $350 billion, with the taxpayer picking up $125 billion of that. Everyone wants drugs to be cheaper, and a healthcare system that pays for it to be simpler.
And in the search for a "bad guy" to blame for high prices, the pharmaceutical industry and much of the media have settled on Pharmacy Benefit Managers (PBMs). But it's worth asking precisely for whom they are bad.
PBMs are the third-party administrators of prescription drug programs for health insurance plans. They're so important that the Savings and Retirement Foundation recently hosted an event on Capitol Hill to shed light on the costs inherent with constraining PBMs.
They run the plans' drug formulary, process claims, and — most importantly — negotiate discounts with drug manufacturers. Basically, PBMs are the intermediaries between health insurance and pharmaceutical companies, negotiating price breaks for the buyers.
The problem for PBMs' reputation management is that, given the opaque nature of drug pricing, consumers have no way to discern how much PBMs have saved them. Instead, they are often misrepresented as "middlemen," taking a cut and adding to high prices without providing anything of value.
But the notion that medicine would be cheaper without PBMs is a textbook example of the fallacy of the false alternative. Those parties who want them out of the way — most notably independent pharmacists — are not interested in saving money for patients; they're interested in saving money for themselves.
There are currently four proposals under way that would reduce the efficacy of PBMs.
Dispensing Fee Floors
Pharmacies make most of their money on the spread between their cost for the drug and how much they receive in both reimbursement and dispensing fees from insurers.
The current commercial dispensing fee under PBMs averages less than $2, but several states have proposed legislation to mandate reimbursement rates of between $9 and 12. A nationwide dispensing fee of just $10.50 would increase costs to patients by more than $16 billion a year.
Limiting the Home Delivery of Drugs
Delivering medicine by mail is a winning strategy for patients, especially those with mobility issues. Mail delivery is less expensive and also dramatically improves drug adherence, since the patients can't neglect to pick up their refills.
But independent pharmacists don't get to take their cut when this happens, so they want to limit or outright ban mail delivery. Some states, most notably the oh-so caring, liberal New York, have banned plans from requiring home delivery because of this.
One study estimates the savings for home delivery is a whopping $13.7 billion, savings that independent pharmacists would prefer not to pass along to the consumer.
Imposing Price Mandates
Independent pharmacies can't buy in bulk the way large national drug chains can, so they have pushed for price controls on PBM-negotiated rates, seeking price floors that are far above the equilibrium price the market might otherwise reach.
Price mandates like this, under the guise again of saving the patient money, would directly profit pharmacists by preventing PBMs from negotiating lower prices. The government acknowledges that increased spending on Part D plan subsidies and the higher premiums for enrollees from doing this would impose an estimated annual cost of $4 billion.
Banning Preferred Pharmacy Networks
Much like "in network" doctors, preferred pharmacy networks give discounts to those pharmacies that opt in. They help patients get drugs at a lower cost and empower PBMs to optimize drug delivery and save money. A bill currently in the House of Representatives, HR 2608, seeks to limit the use of these networks in Medicare Part D, which would increase spending in Medicare Part D alone by $4.5 billion a year, according to one study.
Limiting preferred pharmacy networks would also cost the employers who rely on them roughly $1.1 billion per year in higher drug costs.
Adding all these up comes to a massive $39 billion in additional healthcare spending — all in the name of eliminating a "middleman."
Blaming healthcare costs on PBMs is tempting, but misguided. Both the Trump and Biden administrations have bludgeoned the industry, because it seems like the simple way to cut the Gordian knot of American medicine in half. But it's not: Without PBMs, prescription drugs would cost patients and the government even more.
Jared Whitley is a long-time politico who has worked in the U.S. Congress, White House and defense industry. He is an award-winning writer, having won best blogger in the state from the Utah Society of Professional Journalists (2018) and best columnist from Best of the West (2016). He earned his MBA from Hult International Business School in Dubai. Read Jared Whitley's reports — More Here.
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