A Bipartisan Fix for the Prescription Drug Market

It is no secret that health care policy is a frustrating topic on Capitol Hill.  That frustration reflects the worry felt by Americans searching for affordable health insurance and pharmaceutical options amid an opaque, complex and costly system.  While Republicans and Democrats agree our health care system is broken, we often have very different ideas about what reforms will sustainably reduce costs and improve patient outcomes.

How pharmacy benefit managers break the prescription drug market

One thing we have long agreed on, however, is the need to crack down on pharmacy benefit managers (PBMs), the middlemen who negotiate between and set prices for insurers, drug manufacturers, pharmacies and patients.  PBMs were created to help manage the complexity of the prescription drug supply chain.  Positioned at the center of the market, PBMs can exact large concessions from manufacturers and pharmacies. 

Unfortunately, those savings are not always passed on to patients and taxpayers.  For years, reports have shown that lack of transparency and perverse incentives increase costs and reduce options for patients.  For instance, PBMs often give special terms to their affiliated pharmacies and charge opaque, unreasonable fees to others. 

Consolidation in the insurance market has worsened these problems.  Because most of the major PBMs share corporate ownership with insurers and pharmacies, they have little reason to use their negotiating power to drive down prices.  Instead, vertical integration incentivizes PBMs to steer patients to affiliated pharmacies and highly rebated treatments, regardless of price or effectiveness.

The government funding package recently signed into law by President Trump is beginning to tackle these issues.  It includes critical bipartisan provisions advanced by the Senate Finance Committee that will prohibit some particularly harmful practices and disincentivize PBMs from raising costs for patients.

Recent Congressional action

To support independent pharmacies, especially in rural areas, Congress reinforced protections that require PBMs to contract with all pharmacies that agree to their standard terms and conditions, not just their corporate affiliates. Allowing PBMs to set different terms for different pharmacies threatens small and independent pharmacies, forcing them to choose between operating at razor-thin margins (or even at a loss) or simply refusing to accept certain insurers.  In turn, many patients have struggled to find nearby pharmacies in their insurance network, which has limited their access to needed medications.

PBMs and pharmacies will now be required to report drug prices and other information to Medicare plan sponsors and to the U.S. Department of Health and Human Services.  Combined with a provision allowing Medicare Part D plan sponsors to audit their PBMs for compliance with their contracts, this increased transparency will help insurers and pharmacies make more informed decisions about the PBMs they work with.  As a result, PBMs will face more pressure to improve services and reduce costs.

Removing a dangerous moral hazard

To address perverse incentives for PBMs to prefer higher-priced drugs, the law also delinks PBM compensation from the list price of prescriptions and the rebates they negotiate with drug manufacturers.  Currently, PBMs favor higher list price drugs that offer larger rebates.  In some cases, PBMs restrict access to lower-priced, equally effective medications to increase their compensation.  In response, manufacturers are often forced to raise the sticker price for drugs to produce larger rebates in return for better coverage.  Patients pay the price in this misguided structure, so we took the first step in preventing this practice in Medicare Part D.

These reforms lay a solid foundation for further efforts to increase transparency and reestablish competition in the prescription drug market.  Competition, after all, works best when patients and pharmacies have a clear understanding of how much they are paying for drugs and have multiple options for where to buy them.  By restoring that much-needed clarity to Medicare Part D, this law marks real progress in the fight to reduce costs across the health care industry.

This article was originally published by RealClearHealth and made available via RealClearWire.