Like it or not, prescription drugs are a part of daily life for most Americans. Working-age Americans fill an average of one prescription per person per month at retail pharmacies, and we now spend over $1,000 per person per year on pharmaceuticals. Despite the industry’s ubiquity, few people know how prescription drugs are priced and paid for. This is why the media, politicians, and an increasing number of employers are calling on the companies responsible for managing this industry, pharmacy benefit managers (PBMs), to change their ways and become more transparent.
For too long, PBMs have succeeded in extracting obscene profits from businesses, workers, and taxpayers, and have failed to adequately control prescription and health benefit costs. The three largest PBMs (Express Scripts, CVS Caremark, and UnitedHealth Group’s OptumRx) are all Fortune 25 companies, either alone or through their parent companies. Together they control 78 percent of the country’s PBM market and earned a combined $13.2 billion last year. Even though these three PBMs have an incredible amount of leverage, drug spending is still increasing at an unsustainable rate. Between 2014 and 2015, U.S. drug spending increased by 20 percent.
If the PBM industry doesn’t clean up its act, I believe it is only a matter of time before we see more government regulation in this space. In most other developed countries, the government plays a large role in determining which drugs will be covered and how much they will cost. PBMs play this role in the U.S., but their practices are notoriously opaque and self-serving.
For example, a major PBM was caught a few years ago colluding with a drug manufacturer to steer patients towards its high-cost drug, rather than a rival’s less expensive alternative, in exchange for illegal kickbacks from the manufacturer. Another PBM that is integrated with a pharmacy chain has been accused of pressuring independent pharmacies to accept lower reimbursement rates, demanding special “play-to-pay” fees, and kicking independent pharmacies out of their network if they refuse. What’s more, PBMs routinely collect manufacturer rebates that are supposed to lower drug prices for consumers, and then fail to pass them along to patients or plan sponsors. Brokers, pharmacy consultants, carriers, and third-party administrators have also been caught taking per-script fees, usually without the client’s knowledge.
All of this makes it nearly impossible for a plan sponsor or consumer to determine the true cost of prescription medications. And without transparent pricing information, the market fails to function efficiently. The manufacturers, pharmacies, and PBMs with the most clout and connections are rewarded, while competition withers and consumers pay ever-higher prices.
Although I am personally not in favor of more government intervention in our healthcare system, the case is already being made. A 2017 study by The Commonwealth Fund found that U.S. pharmacy spending is 30-190 percent higher than in other developed countries that don’t rely on PBMs to control prices. In addition, the two government agencies that are allowed to negotiate drug prices, the Veterans Health Administration and Department of Defense, already pay prices that are about 50 percent lower than retail.
I believe that a free market with transparent pricing will always produce better outcomes than government control. Perhaps government can play a role in getting us there, such as through Health and Human Services Secretary Azar’s recent proposal to eliminate the rebate system and require PBMs to negotiate fixed-price contracts. Until we realize this goal, however, benefit purchasers need to be educated, vigilant, and working with advisors and pharmacy partners who are committed to true transparency.