Members of the Senate Finance Committee recently introduced a bill to place more restrictions on how pharmacy benefit managers (PBMs) — the groups that health plans utilize to administer their prescription drug programs — manage Medicare Part D. Unfortunately, their legislation does not adequately consider the Government Accountability Office’s (GAO) past and pending findings concerning the utility PBMs provide in lowering federal entitlement spending.
While this bill is the most recent congressional attack on PBMs, it is not the only one. Other members of Congress recently sent a letter to the U.S. Comptroller General’s office asking the GAO to “perform a study on the role of pharmacy benefit managers (PBMs) in the pharmaceutical supply chain.” No harm can come from the GAO conducting additional analyses; that said, imposing new regulations on how PBMs administer Medicare Part D would seem to be premature at this time. Over the years, the GAO has analyzed this issue at length and has found that PBMs are a net positive — not a net negative — on federal costs related to prescription drug programs.
Before discussing PBMs further, it would be prudent to explain what they are and how they work.
In February congressional testimony, University of Chicago economist Casey Mulligan, who chaired the President’s Council of Economic Advisers from 2018-2019, did a very good job of explaining the role they play in the healthcare industry. He described PBMs as the buyers’ clubs (think Costco or Sam’s Club) of drug pricing.
When health plans want cheap drugs, they hire PBMs to administer their plans and negotiate pricing deals with the drug manufacturers. Since each PBM manages many plans nationwide, they carry a lot of clout. Every manufacturer wants to make a deal with them — even if it means dropping their prices and providing bulk discounts. This creates a highly elastic pricing environment that benefits payers.
Some industry stakeholders have expressed legitimate concerns about the lack of transparency relating to certain PBMs as well as whether a few give some individuals (especially non-insured patients) adequate access to certain drugs. Still, the data on the net benefits PBMs provide to lowering overall health care costs is clear.
In 2008, several months after I left GAO, Peter Orszag, who at the time ran the Office of Management and Budget (OMB), testified that PBMs are “the primary explanation for why Part D in Medicare is costing a lot less than was projected initially.” He was right. They saved the federal government considerable sums by shifting government health plans away from brand drugs and toward generics. For this very reason, the Federal Trade Commission spoke out against potential PBM regulations months later.
A 2017 Visante study found “PBMs save payers and patients an average of $941 per year.” Similarly, a 2019 GAO study found that the rebates the PBMs secured from manufacturers offset Part D spending by 20% ($29 billion). That’s no small chunk of change.
In July 2022, Casey Mulligan produced a study concluding “pharmacy benefit management is worth at least $145 billion annually beyond its resource costs.” It also found that “PBM services add at least $192 billion annually in value to society compared to a manufacturer price-control regime.”
We’re now living in a time where Medicare spending is expected to top $1 trillion this year, and national health spending is projected to hit $7.2 trillion in less than 10 years. We don’t have money to waste. PBMs are one of the few entities helping to dampen the trajectory of this runaway spending.
At the time of the GAO’s 2019 analysis, Medicare Part D sponsors used PBMs to provide nearly three-quarters of all their drug benefit managing services. While Congress may seek to explore new ways to regulate them, the legislative branch should consider past and pending GAO studies and also explore ways to increase the federal government's use of them. That would seem to be the fiscally responsible thing to do.
