Commentary

PBMs are modern-day drug price gangsters and must be held accountable

April 24, 2023 4:30 am

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In March, Ohio Attorney General Dave Yost filed a groundbreaking lawsuit challenging the coercive tactics of the shadowy, modern-day health care mafia known as pharmacy benefit managers (PBMs). You may not have heard of PBMs before, but they play a critical role in controlling which medications your insurer covers. While that may sound like a relatively minor job, PBMs have become the gatekeepers of the prescription drug industry, exploiting their monopoly power to jack up prices, limit access to affordable medicines, and line their pockets with billions of dollars in profit. Using behind-the-scenes negotiations and secret deals, this cartel has enriched themselves by extorting patients, pharmacies, and health care providers across the country.

The lawsuit targets Express Scripts and Prime Therapeutics — two of the largest PBMs in the U.S. Together, they control a mysterious and secretive company in Switzerland called Ascent, which Yost alleges is merely a front for a price-fixing conspiracy that would make even the Genovese crime family proud. Under Ascent’s veil, Express Scripts and Prime Therapeutics agree to restrain competition and leverage their and client Humana’s combined intelligence and market power to strong-arm manufacturers into raising prescription drug prices. The accusations are hardly a surprise for the PBM industry’s longtime critics, who’ve yet to see much progress in the way of reform. But the lawsuit does arrive amid heightened momentum throughout the country, among Republicans and Democrats alike, in state legislatures and the U.S. Capitol, in attorneys general offices and the Federal Trade Commission, to crack down.

To understand what PBMs do, let’s take a patient with attention deficit hyperactivity disorder (ADHD). The patient may find their health plan requires them to take Concerta, a drug that a 54 mg, 30-day supply costs a pharmacy about $419 to buy, rather than a generic equivalent, which costs just $26. Why would an insurer do this? Well, that decision was not up to the insurer. It was up to a PBM.

PBMs come up with the lists of medications that health plans cover each year for their beneficiaries. The idea is that PBMs can use the collective power of multiple plans to get price concessions from manufacturers in exchange for better rankings on the lists. The better the ranking, the more coverage the plan gives to that drug. Janssen Pharmaceuticals, Concerta’s maker, can ensure the generic gets a worse ranking or is excluded entirely by offering the PBMs a larger rebate than the generic would ever be able to afford.

As Senate Finance Committee Chair Ron Wyden (D-OR) said during a hearing in late March, these are the “perverse incentives” of the PBM business model: PBMs are paid a percentage of the rebate, so they’re incentivized to give better coverage to more expensive drugs when coming up with their lists. This heightens drug spending not only by benefiting brand drugs over generics but by encouraging brand makers to compete with one another by continuously raising their prices.

Health plans are often not aware they’re being fleeced because they have no idea what the real list and net prices are and how much of the rebates the PBMs are retaining. The PBMs claim all this data is proprietary, even though these are the very figures Express Scripts and Prime Therapeutics are allegedly sharing to fix the market. Since they’ve gotten away with claiming the information must be concealed, PBMs are also able to justify being the financial middlemen when a patient goes to the pharmacy counter to pick up their prescription. This gives them another avenue to skim profits, this time from independent pharmacies.

When the ADHD patient buys Concerta, for example, the PBM transmits the reimbursement from the health plan to the pharmacy, while taking a cut. This leaves the pharmacy with just $415 for the $419 drug, in addition to a $10 copay from the patient. That’s already a slim margin for any business to operate on, let alone that PBMs often charge pharmacies additional fees they keep for themselves. They “are actually driving our independent pharmacies and our rural pharmacies into submission or gone,” Senator James Lankford (R-OK) said during last month’s hearing.

There’s another perverse incentive in the PBM business model that’s leading them to squeeze these drugstores into insolvency: they have their own mail-order pharmacies they’d rather steer patients to. This is just one type of “vertical integration” that Chair Lina Khan’s FTC is probing as part of a sweeping investigation into the PBM industry. Representative Buddy Carter (R-GA) revealed at a House Energy and Commerce Committee hearing in March, though, that the PBMs are outrageously not cooperating. Beyond the conflicts of interest, just three PBMs – Caremark, Optum Rx, and Express Scripts – also control 80 percent of the industry, giving them what Senator Bob Menendez (D-N.J.) called “inappropriate negotiating leverage.”

The floodgates are finally opening, but legislators and regulators must not squander this opportunity to enact half-baked measures. With payers facing mounting, unjustified bills each year, there’s no time to waste. To fix this, do not only impose transparency on the system. Address the underlying market failures by reversing the poorly conceived exemption from the Anti-Kickback Statute that PBMs were given more than 30 years ago so they could take rebates from manufacturers.  Outlaw PBMs from having their own pharmacies and other conflicts of interest to clamp down on the absurd leverage the few giants have against their competitors and against health plans, patients, providers, and drug makers. As Ohio AG Yost said last week, “PBMs are modern gangsters… scheming in the shadows to control drug prices on all sides of the market.”

Sara Sirota is a Policy Analyst at the American Economic Liberties Project.

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