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The high cost of prescription drugs has been an issue on the minds of many Americans for years. Now, Congress is beginning to investigate a previously under-the-radar culprit behind the sky-high prices, Pharmacy benefit managers (PBMs).  Essentially, PBMs are middlemen who negotiate between insurance plans and drug companies. Due to a series of perverse incentives in the current pharmaceutical ecosystem, these companies can pocket huge profits while keeping drug costs artificially high for millions of Americans.

PBMs primarily serve as intermediaries between pharmaceutical companies, insurance plans, and employers who provide those plans to their employees. In theory, they are supposed to negotiate deals to create the best outcome for the parties involved and to lower costs. While PBMs may take nominal steps to “lower” costs, it is most lucrative for them when drug list prices are higher. They have a set of underhanded tactics at their disposal to pad their bottom line, while keeping drug costs higher for employers, health plans, and – ultimately – patients.

The first way this is done is through rebates. A PBM could negotiate to purchase prescriptions from a pharmaceutical company for $500 per month, but agree to a $100 per month rebate every time a purchase comes in. So, the true cost is $400 per month. However, the PBM can – and often does – pocket a large portion of that rebate. In this instance, PBMs could keep $80 of the $100 rebate and only pass along the other $20 to employers.

Employers, meanwhile, think they get a nice discount to $480 per month from $500. However, the pharmaceutical company could have just sold it for $400. The difference is that the PBM could not have pocketed a nice rebate for itself. In this way, PBMs are incentivized to keep prescription prices higher, so they have the opportunity to negotiate higher rebates. If drug costs went down, or employers paid closer to face value, PBM profits would plummet.

The second way this is accomplished is through what’s called “spread pricing.” In another hypothetical scenario, a PBM negotiates a discount for a drug with an average wholesale price (AWP) of $50 per month. In this instance, they negotiate an 80 percent discount to $10 per month. Ultimately, there is a maximum allowable cost (MAC) for pharmacies. If, for this drug, the MAC was $5, the PBMs could pocket the excess $5 for itself.

However, the national average drug acquisition cost (NADAC) for this particular drug could be far lower than that, at $2 per month. Pharmacies could then pocket an extra $3 for itself. Again, employers think that they just got an 80 percent discount and are doing well. Meanwhile, that drug really only cost $2 per month and PBMs pocketed $5 and pharmacies received $3.

PBMs get contracts based on negotiating down from list prices or prices based around the AWP. However, the AWP is a largely fictitious number – much like a list price on a car. Many joke that AWP actually stands for “ain’t what’s paid.” NADAC is a more accurate number, but PBM contracts rely on this false AWP number and both they and the pharmacies are able to generate revenue from these mythical discounts that – in actuality – leave employers and plans paying more.

As lawmakers increasingly realize this, they are working to curtail these predatory behaviors. This is especially important for government plans, like Medicare. In that instance, the plan is funded through taxpayer dollars. When PBMs rip off Medicare, it’s American taxpayers who are bearing the financial burden.

Congress has many resources at its disposal. It can implement transparency measures. Short of an outright ban on rebates and spread pricing, a transparency push would make it clear what deals are going on behind the scenes to better inform employers and plans about what the actual cost is. This would also be key for oversight in Medicare to identify waste, fraud, and abuse – especially during a debt ceiling fight.

Congress has a little less authority to ban these practices altogether, but can certainly do so solely within Medicare. Because Medicare is a government taxpayer-funded plan, government can – and should –address the ways PBMs are squeezing hard-earned taxpayer dollars into their own coffers.

Prescriptions account for 20 percent of healthcare spending in the United States. This is no small issue. As the hypotheticals above illustrate, there are a lot of hidden costs being foisted onto patients and families that are based on entirely made-up numbers. There has been bipartisan support for PBM reform in the past. In a narrowly divided Congress, this is a clear opportunity to deliver a win for the American people.

Daniel Savickas is Government Affairs Manager for Taxpayers Protection Alliance. 

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