Drug Price Legislation Inexplicably Exempts Important Market Forces

While the current Congress has only been organized for a few months, it has moved quickly on a number of issues, and one of those has been to study legislation that would limit the power of pharmacy benefit managers, or PBMs. However, it has inexplicably failed to consider the impact that pharmacy services administrative organizations or pharmaceutical wholesalers – who can also be construed as “middlemen” – have on the market. Congressional leaders should pause and properly consider the risks and harms to patients and employer health sponsors from hastily proceeding down the current legislative path.

Pharmacy benefit managers, or PBMs negotiate prices with pharmaceutical companies on behalf of governments, insurers, unions, and large employers. PBMs leverage the purchasing power of their collective clients to help negotiate lower drug costs with pharmaceutical companies, which often have a monopoly on their drugs via their patent.

PBMs effectively serve as a counterweight to this monopoly power: they leverage competition among drug makers to obtain lower prices in exchange for inclusion on plan formularies. If there are multiple brand drugs within the same class that are similarly effective, PBMs can negotiate discounts by having them compete against each other on price. If a PBM were to refuse to add one of these drugs to its formulary, the excluded drug’s pharmaceutical company would lose access to a major sector of the market, so it must negotiate in good faith. These negotiations translate to lower healthcare costs without sacrificing patient access to effective drug treatments.

However, some argue that PBMs are mere “middlemen” that add little of value, and thus removing their presence—or at least diminishing it—would reduce healthcare costs. There is currently legislation being considered by both the Senate Commerce Committee and House Energy and Commerce Committee (where I once served as a senior economist) that would effectively constrain their role in reducing costs within the prescription drug market.

It is a good bet that these committees won’t have the time to entertain other legislation pertaining to prescription drugs, which means that these bills represent the only vehicle for Congress to address drug prices for the next 18 months.

I believe—and have written—that blaming PBMs for high drug prices is nonsensical, but it seems as if people on both sides want to embrace a facile solution to a complicated problem rather than confront the unfortunate reality that there are no easy solutions.

However, if Congress is determined to attribute forces other than the cost of making and testing drugs for high prescription drug prices, then it should look at the roles of other players in the prescription drug industry to determine how their presence impacts the market as well. There is more to the supply chain than pharma, PBMs, and insurers.

For instance, most independent pharmacies belong to a Pharmacy Services Administrative Organization, or a PSAO, which negotiates dispensing fees and drug reimbursements with PBMs while also providing many other “back office” services for them. Independent pharmacies are not merely price takers, although that is the perception that many in Congress seem to have. In their negotiations they seek to increase what they can charge for drugs.

What’s more, independent pharmacists spend considerably in their efforts to try to prevent the direct delivery of prescription drugs to patients. While the evidence shows that direct delivery greatly increases prescription drug adherence and—as a result—improves health outcomes and reduces healthcare costs, it effectively cuts out independent pharmacists from the market, costing them money. My colleague Tony Lo Sasso and I found that PBMs save the economy and consumers nearly $35 billion a year.

The wholesalers that distribute prescription drugs to pharmacies also play an important role in the pharmaceutical market and have escaped any attention from Congress. Wholesalers charge manufacturers by adding a margin of 10 to 12 percent to the list price, which adds to healthcare costs. The wholesalers also own many of the largest PSAOs, which raises questions about wholesalers’ potentially conflicting incentives in the supply chain: They first negotiate prices for prescription drugs with manufacturers that they then sell to pharmacies, and they also own the organizations that negotiate reimbursements from PBMs for those same drugs on behalf of the pharmacies.

Congress has limited its concern with mis-aligned incentives in the prescription drug chain to PBMs, which are likely the least dependent on high drug costs across the drug supply chain. Drug companies, of course, make more money off of higher prices, but so do wholesalers. In fact, raising the list price of a drug raises the wholesalers’ assets and capital base. And while Congress focuses on the mistaken notion that PBM rebates increase list prices, they have overlooked the fact that wholesalers also negotiate rebates off the list price of a drug.

Its approach to examining the drug supply chain suggests that Congress has fallen for the sophistry pushed by self-interested antagonists working against PBMs.

If Congress is intent on reforming how the market functions, looking at only a single actor in the drug supply chain would be a grievous mistake, especially given that the current legislation under consideration will likely be the only chance the body has to address drug prices before the next election. Congress should take the chance to reduce costs for patients, instead of raising them.