Pharmacy Benefit Managers Are The Wrong Target In Biden’s Quest To Reduce Drug Prices

Prescription drug prices remain high despite the fact that the Biden Administration—and its predecessors—have declared reducing prices as a top priority, and the public has been demanding action on this issue for many years. Despite this, manufacturers continue to raise prices: Good Rx, a company that tracks drug prices, reported that there were more than 800 drug price hikes in January alone.

Congress has signaled a desire to address the issue, and a predictable blame game has kicked off in Washington as to why prices are so high and what would be the most expedient way to control their costs. Some members of Congress and people within the Biden Administration want to attach blame to the pharmacy benefit managers for being mere “middlemen” that take money without providing anything of value to the market, and assert that if we limited their role we could reduce costs.

Such suggestions effectively obscure what PBMs do, as well as the very nature of the market for prescription drugs. Cutting their influence would do nothing to arrest high drug prices.

Pharmacy benefit managers (PBMs) act as a necessary and effective intermediary between pharmaceutical manufacturers and health insurers. In essence, they counter the market power of a pharmaceutical company by creating a formulary—a list of drugs that the PBM will provide for the patients it covers—and negotiating steep volume discounts for these drugs by dint of their scale.

Since pharmaceutical manufacturers with a blockbuster drug can act as a monopolist by charging high prices, PBMs can bargain with them and reduce the prices they and their clients and members pay for their drugs.

PBMs reduce Medicare Part D costs to beneficiaries and the government by obtaining rebates from the drug companies based on how much they purchase from them, rather than negotiating lower drug prices directly.. The PBMs pass these savings on in the form of lower premiums and reduced government outlays for Part D.

Additionally, pharmacy benefit managers employ a variety of methods to help their customers control costs, including specialty pharmacies, programs that encourage consistency in patients’ drug regimens, and tools that help patients avoid unnecessary or potentially dangerous drug interactions.

However, some politicians have taken issue with PBMs: the previous administration said that PBMs were merely “middlemen” and that reducing or eliminating their role would somehow reduce drug prices.

Others have objected to the fact that PBMs don’t negotiate for lower up-front prices per se, but for rebates on the drugs they purchase, and question whether these rebates are passed back to the patient or if they contribute to rising drug prices. Indeed, some pharmaceutical manufacturers have claimed that they are “forced” to hike their drug prices because of the downward price pressure that PBMs create with rebates.

Alex Brill, an economist and senior fellow at the American Enterprise Institute, recently produced a study that tried to determine whether the latter point could be true. He obtained list prices for two subsets of drugs— both rebated and non-rebated—for 2018-2021 and analyzed changes in the wholesale acquisition cost for each drug’s national drug codes over that period.

Brill found that the cost increases for rebated and non-rebated drugs were essentially no different during that period. In doing so, his study shows that these claims by pharmaceutical manufacturers are not supported by the data. Pharmaceutical manufacturers are responsible for the prices that they set for their drugs.

There is no easy way to reduce the growth in drug prices: It can cost several hundred million dollars to develop a new drug and test it to ensure its safety and effectiveness. Most of our new blockbuster drugs are biologics, which are more complicated and costly to develop than small molecule drugs, and gene therapy—which promises to transform treatment for a whole host of maladies—is even more costly to develop.

It is easy to understand why politicians have come to attach blame to pharmacy benefit managers. The idea that the best way to constrain sellers with considerable market clout is by empowering a market where buyers have similar market power may be well-accepted by economists and even within certain corridors of government, but it’s not intuitive to many Americans. While the public continues to demand swift action on prescription drug prices, limiting the power of PBMs wouldn’t make prescription drugs more affordable at all, despite its intuitive appeal.

Even the government has acknowledged that efforts to rein in PBMs would be counterproductive. Both the Government Accountability Office and the HHS Office of the Inspector General found that the rebates PBMs negotiate in Part D lower the costs of premiums for beneficiaries and taxpayers alike, and a study by the consulting firm Oliver Wyman found that rebates reduced aggregate drug costs in Medicare Part D by $35 billion.

That reality is why the Trump Administration repeatedly waffled on its threat to decapitate “the middlemen” in its quest to reduce drug costs, and why the Biden Administration should look elsewhere if it truly wants to constrain the cost of prescription drugs.