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- Jul 19, 2024
Updated: Sep 19, 2024
TO: Senators Butler and Padilla
FROM: Emily Camarena, Branden Ducharme, Zola Hoffmeister, Parvati Kaushik, Miu Kikuchi, Anna Kim, Juslyn Theriault
DATE: May 29, 2024
RE: Decreasing Prescription Drug Costs Through Increasing Financial Transparency Among Pharmacy Benefit Managers
Executive Summary
As prescription drug costs have increased, millions of Americans unable to afford medications have accumulated medical debt. Pharmacy Benefit Managers (PBMs) have come under scrutiny for their role in this crisis. To alleviate this issue, we present three policy options: ending spread pricing, increasing PBM financial transparency, and allowing Medicaid to negotiate drug prices. Ultimately, we recommend increasing PBM financial transparency by supporting the Pharmacy Benefit Manager Transparency Act (PBMTA) of 2023 because it will lower prescription drug costs, is easily implementable by the Federal Trade Commission (FTC), and has received bipartisan support.
Background Summary
Comprehensive public health insurance has been a hotly-debated issue since the federal government became more involved in healthcare. With the advent of Medicare and Medicaid under President Lyndon Johnson’s Great Society in 1965, the government began to provide healthcare to low-income and senior citizens. These programs were an attempt to mitigate the costs of healthcare, from drug prices to hospital visits. While initially well-intentioned, increasingly dysfunctional health insurance policies have failed to lower consumer drug prices, with many patients lacking necessary medications because of their costs. According to the National Health Interview Survey (NHIS), 43% of adults report that they or a family member in their household delay necessary healthcare due to the cost.1 The failures of Medicare and Medicaid, as well as rising drug costs, have contributed to the national medical debt which stands at over $220 billion.2 To combat these issues, legislators have begun to focus on the role of PBMs in determining the prices of consumer drugs.
Issue Analysis
PBMs came into existence during the 1950s to meet the growing need for specialized administration of prescription drugs. PBMs act as intermediaries between insurance companies
and pharmaceutical manufacturers, directly affecting the types of drugs covered under consumers’ insurance plans and their costs. However, they have begun to leverage their authority in ways that contribute to healthcare unaffordability in the U.S.
PBMs profit from administration fees, rebates, and spread pricing. They are not required to disclose the amount of the rebates they receive from drug companies or their reasoning for moving a drug to a higher tier of an insurance plan. This lack of transparency allows PBMs to engage in pricing practices that harm consumers, inflating drug prices for their own profit. The majority of their profit comes from spread pricing. This refers to the practice of charging consumers a higher price for drugs than what PBMs reimburse to pharmacies, keeping the difference as profit. This extra cost is passed on to consumers in the form of higher premiums, co-pays, and out-of-pocket expenses.
Options
End Spread Pricing
One solution to high drug prices is restricting the ability of PBMs to engage in spread pricing. Spread pricing has led to increasingly higher costs to consumers. Numerous states have found that ending spread pricing would help consumers by protecting them from paying the difference between pharmaceutical prices for drugs and prices outlined in PBM insurance plans. Thus, preventing spread pricing is an effective way to lower drug costs for consumers.
The Pharmacy Benefit Manager Reform Act (PBMRA), introduced in the Senate by Senator Bernie Sanders, would effectively prohibit spread pricing by PBMs while simultaneously working to limit the influence of PBMs. However, some critics argue that ending spread pricing could lead to an increase in prescription drug prices—PBMs might respond to the loss of revenue by negotiating with pharmaceutical companies to raise prices at the source. Additionally, price spreading is widely practiced and is the primary source of profit for PBMs; the abrupt shift away from spread pricing could negatively disrupt PBM operations, leading to administrative burdens and potential job losses. Still, the PMBRA would lead to more benefits for the general population than losses.
Increase PBM Financial Transparency
Increasing financial transparency for PBMs can help discourage them from employing practices that increase healthcare prices. The PBMTA has been proposed to increase transparency regarding pricing practices among PBMs. This could lead to reduced drug prices by revealing unfair pricing strategies. However, implementation of the act could heighten the administrative burden on the FTC, which would be tasked with monitoring PBM practices. To alleviate this issue, we propose an internal task force within the FTC specifically dedicated to monitoring unethical pricing procedures. ThePBMTA also does not mandate substantial operational changes for PBMs, thereby minimizing disruptions to the healthcare system as compared to more radical legislative approaches like PBM elimination.
Allow Medicaid to Negotiate Drug Prices
PBMs have repeatedly come under fire for raising consumer prices through their monopoly of the pharmaceutical industry. Enabling the government to negotiate drug prices with pharmaceutical companies will encourage competition and potentially reduce drug costs. Medicaid and Medicare could compel pharmaceutical companies to maintain competitive pricing and establish a pricing benchmark that may incentivize other pharmaceutical companies to lower their prices to remain competitive. Consequently, empowering Medicaid and Medicare to negotiate drug prices would not only lower costs for beneficiaries of these programs but could also reduce out-of-pocket expenses for other consumers. Such negotiations could foster greater transparency in drug pricing, encouraging pharmaceutical companies to keep their prices reasonable.
However, one drawback of this plan is the potential loss of revenue for pharmaceutical companies. This may lead to reduced investment in research and development for certain medications or a withdrawal from the market if costs cannot be covered. Additionally, negotiation processes entail administrative expenses and resource allocation, which may divert resources from other critical healthcare areas. Nevertheless, this approach offers flexibility and can be tailored to focus on negotiating prices for only specific medications with unaffordable costs, thereby mitigating unintended consequences. A similar proposal that was passed in 2022, the Inflation Reduction Act, contains legislation enabling Medicare to directly negotiate with drug companies to expand access to expensive consumer drugs. The resulting negotiated prices will only become effective in 2026, so other actions must be taken until then to lower the costs of medication.
Recommendation
The PBMTA is the best way to address the PBM-influenced increase in drug prices. The PBMTA of 2023 would reduce spread pricing, protecting consumers from having to pay a high cost for their health insurance premiums. It will also require PBMs to submit an annual report with the FTC regarding information on their charging practices. It also mandates disclosure of specific reasons for an increase in cost for consumers. Moreover, the bill provides a comprehensive guide that lists what actions are permitted, reducing room for miscommunication or a PBM’s ability to circumvent the bill.
Additionally, the PBMTA provides a solution that is less disruptive to the health care system and is therefore likely to garner bipartisan support if brought to the Senate. The bill’s political appeal is further supported by its bipartisan authorship. The bill is also supported by organizations such as the American Medical Association, American Pharmacist Association, National Consumers League, and the PBM Accountability Project. While different groups have conflicting interests regarding transparency measures, there is widespread public support for decreasing prescription drug costs. The PBMTA attempts to address the various parties’ concerns by allowing PBMs to engage in spread pricing and other practices as long as they report all discounts to health plans and disclose all financial information to the FTC. Overall, the bill has amassed great political support because it balances various interests regarding PBMs and prescription drug prices.The PBMTA is also administratively feasible.
The FTC is tasked with enforcing federal consumer protection laws that prevent fraud, deception, and unfair business practices.3 So, it is well within the FTC’s role as a consumer protection agency to encourage PBM transparency and enforce the appropriate repercussions for consumer deception and unfair business practices. Additionally, to ensure PBM transparency from a legal standpoint, state attorney generals will enforce the bill, providing consumer protection in the courts. State attorney generals are best equipped to enforce this legislation as the utmost legal authority in each state. Thus, the administration of this bill is well-managed in the hands of the FTC as the primary enforcer of the legislation while state attorney generals act as an added safeguard of consumer rights.
Conclusion
In total, people in the U.S. possess $220 billion in medical debt; this alarming statistic exacerbates financial hardship and limits access to healthcare.4 To address one cause of this issue, PBMs should be better regulated through the PBMTA, which is supported by a bipartisan panel and various other organizations. Endorsing the PBMTA is not only a healthcare necessity, but a moral obligation to alleviate national medical debt.
Sources
1 Rakshit, Shameek, Krutika Amin, and Cynthia Cox. “How Does Cost Affect Access to Healthcare?” Health System Tracker, January 12, 2024. https://www.healthsystemtracker.org/chart-collection/cost-affect-access-care/.
2 Rakshit, Shameek, Matthew Rae, Gary Claxton, Krutika Amin, and Cynthia Cox. “The Burden of Medical Debt in the United States.” Health System Tracker, February 12, 2024. https://www.healthsystemtracker.org/brief/the-burden-of-medical-debt-in-the-united-states.
3 “Enforcement.” Federal Trade Commission. Accessed March 21, 2024. https://www.ftc.gov/enforcement.4 Ibid “The Burden of Medical Debt in the United States.”