How ‘Middlemen’ Help Negotiate Affordable Drug Prices
There has been a lot of talk in recent years about the role of “middlemen” in the high price of prescription drugs. The pharmaceutical industry, in particular, argues that high prescription drug prices aren’t their fault, and that others in the pharmaceutical supply chain—in particular, pharmacy benefit managers, or PBMs—are driving prices upward.
In a new piece at Forbes, I point out that the opposite is true: in general, PBMs are driving a hard bargain on behalf of patients, for lower prescription drug prices. (For more on how wholesalers and PBMs negotiate lower drug prices, please see my extended treatment of this topic in FREOPP’s drug price reform paper, The Competition Prescription.)
There is one aspect of the PBM business model, however, that isn’t aligned with patients’ interests: the way pharmaceutical companies pay PBMs rebates in exchange for PBMs steering patients to costlier, low-value drugs through lower co-pays.
There’s one way in particular in which the interests of PBMs don’t align with those of patients. That’s when manufacturers of costly, branded drugs offer rebates to PBMs in exchange for reducing the co-pay that the insurer charges the patient for their drug. So, to use the hypothetical example above, Amgen might pay Express Scripts, a pharmacy benefit manager, a rebate in exchange for Express Scripts charging the same $5 co-pay for [a costly new cholesterol-lowering drug called] Repatha that they charge for generic Lipitor [a well-established, inexpensive, safe, and effective cholesterol-lowering drug]. PBMs keep some of the rebate, and pass the rest onto insurers, who use them to lower premiums.
You might think, “Great! I can now get a costly drug for only a $5 co-pay.” But the net effect is more pernicious: far greater utilization of an expensive drug by people who don’t necessarily need it, resulting in higher overall insurance premiums for everyone and higher health care costs for taxpayers.
(Sometimes, the effect of rebates is more pro-consumer. Take a market where there are two generic drugs of roughly similar price and clinical effectiveness. If each of those competitors offers rebates to PBMs in exchange for favorable formulary treatment, and those rebates are passed onto insurers and consumers in the form of lower premiums, the end result is more value for the consumer than the status quo ante.)
Another way in which drug companies artificially drive up utilization of their costly medicines is through co-pay assistance. Let’s say the co-pay for Repatha is $30; Amgen may fund a “co-pay assistance program” for lower-income individuals, in which Amgen will pay your co-pay in order to get you on their drug. Again, that may seem great for that particular patient, but the end result is far greater overall spending on costly drugs, leading to…you guessed it: higher overall insurance premiums and higher health care costs for taxpayers.
When pharmaceutical companies describe what they call their net prices, they’re referring to the price invoiced to wholesalers less these rebates and co-pay assistance payments.
The U.S. Department of Health and Human Services is developing a new rule that may eliminate the regulatory safe harbor that allows drugmakers to offer these rebates to pharmacy benefit managers. This is a good idea, as it will drive PBMs to focus exclusively on lowering premiums and drug costs for patients, instead of collecting rebates that may or may not lower costs for consumers.
It has been strange to see some free-market policy experts oppose PBM rebate reform:
In September, two of my favorite health care think-tankers acknowledged in the Wall Street Journal that “manufacturers offer rebates for preferred placement” on formularies, but then surmised — incorrectly — that “a ban on rebates would make coverage more expensive and less generous,” when the opposite is true. Preferred placement on formularies leads to costlier coverage, due to higher utilization of costlier drugs. As premiums rise, insurers and employers tend to make up for it by raising deductibles and other out-of-pocket costs.
More recently, former Oklahoma senator Tom Coburn — one of nation’s most thoughtful voices on health reform — argued that “middlemen like pharmacy benefit managers…demand a part of [drugmakers’] profit, causing pharmaceutical companies to increase the price of a drug.”
This is economically backwards. The reason PBMs’ services are in demand is because drug companies charge high list prices. Drugmakers don’t pay those rebates to PBMs out of the goodness of their hearts; they do so because it is in their economic interests to do so — or, put another way, because they will make more money by offering rebates than by not doing so.
HHS Secretary Alex Azar is on the right track in attempting to reform these rules, and if he is successful at enacting this change, it could be the single biggest thing he does to lower prices for prescription drugs at the pharmacy: something that would disproportionately benefit those who already struggle to afford their medical bills.
UPDATE: Not long after I posted this article, Amgen announced that it was reducing the list price of Repatha by 60 percent, from $14,600 per year to $5,580. (Generic statins like Lipitor cost about $250 a year.) Steven Miller, the chief medical officer of Express Scripts, hailed the move, which itself rebuts the false narrative that PBMs prefer high prices.