If there is one thing Republicans and Democrats can agree upon in Washington right now, it is this: Prescription drug prices are too high and it is time for government to play a more active role in combating this trend.
Over $450 billion is spent at the pharmacy each year, with 96% of that spend processed by a pharmacy benefit manager (PBM). PBMs also play a critical role as middlemen in aggregating purchasing power to negotiate hefty rebates off of the list prices marketed by drug manufacturers.
But rather than passing negotiated cost savings through to health plans or self-insured companies, who are the customers of the PBM and ultimate payers of the pharmacy benefit, PBMs have largely kept these disbursements for themselves. Moreover, PBMs have kept their arrangements with drug manufacturers opaque and secretive, allowing them to charge higher drug prices to their customers than what they admit to paying themselves, pocketing the difference.
Three PBMs—Express Scripts, CVS Caremark and OptumRx—control 78% of the market and have profited massively from this "rebate spread" model in recent years, while consumers and companies have shouldered the burden of annual oral brand-name drug price increases of 9.2% each year since 2008, according to a recent study.
This is why it was encouraging to see the U.S. Department of Health and Human Services (HHS) take an initial step to challenge the business practices of the PBM oligopoly by proposing revisions to existing rules governing the permissibility of these rebate arrangements.
Since 1991, these manufacturer-to-PBM rebates have been aided by safe harbor protection, which exempts these rebate payments from federal rules prohibiting kickbacks.
The HHS proposal looks to replace these manufacturer-to-PBM rebates in Medicare and Medicaid with manufacturer-to-consumer rebates at the checkout counter. While the goal of this point-of-sale price reduction is an admirable one, as end consumers are paying too much for their medications, shifting rebate payments from the PBM to the consumer is unlikely to save consumers money as intended.
So long as rebates persist as a key feature of prescription drug pricing, consumers, companies, health plans and all but a select few will remain confused by how much drugs are truly costing patients. Moreover, possible responses to this by other players in the pharmaceutical supply chain in an attempt to recoup these transfers may end up increasing costs for consumers, whether through higher copays, coinsurance rates or less generous plan design.
Rather than shifting the recipient of rebates, HHS should oppose rebates altogether, given the obfuscation and lack of transparency that is by definition correlated with any such system.
If all rebates lacked safe harbor protections, which would have PBMs leveraging their power to ensure only drugs with a reasonable balance between cost and therapeutic outcome are given favorable treatment on their approved drug plans, manufacturers would finally be forced to revisit their high list prices, an action that is unlikely to occur so long as rebates remain.
In a world without pharmaceutical rebates, manufacturers would be unable to point the finger at rebate-hungry PBMs or consumers as the reason they need to consistently increase list prices. Instead, they would be forced to have true price competition with one another with pricing out in the open rather than hidden behind complicated rebate arrangements.
On Tuesday, the Senate Finance Committee will hold a hearing questioning the five largest PBM companies about their business practices and culpability in increasing prescription drug prices. Congress should push hard to understand why PBMs need to take such a large cut as middlemen in the supply chain.
Senators should contemplate a world without rebates, one where list prices are actual prices and where PBMs compete for business based on their ability to promote strong therapeutic outcomes and service customers more efficiently with their technological prowess, rather than on which rebate arrangements pay them the most.
Replacing rebates with more transparency and smaller margins for middlemen is an important first step in bringing drug prices in this country back under control.