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Prescription drug pricing has a very odd and confusing structure.  Market-based pricing isn’t a feature of the current system. And, what people may not understand is that pharmacy benefit managers (PBMs) are also re-imbursed in a very strange manner. PBMs are currently paid based on the size of the discount they achieve for insurance companies – and, therefore, the employers who offer these insurance plans to their employees. While this seems straightforward, it actually creates upward pressure on prices for patients and families.

Because PBMs are paid based on the size of the discount, they are more attracted to pharmaceuticals with a higher list price. That is because the drugmaker can then afford to offer a bigger markdown, which is ultimately more profitable for the PBM. The incentive is not to get the most effective and/or affordable drug for the plan. It is to get the one with the most artificially inflated price that can afford the biggest discount – also known as a “rebate.”

For example, Drug A might have a list price of $20 per bottle while Drug B has a list price of $10. However, the manufacturer of Drug A is able to give a five-dollar rebate while the manufacturer of Drug B can only knock two dollars off of their list price. The current incentive structure makes it more than twice as lucrative for PBMs to go with Drug A, even though it is twice as expensive.

In this way, PBMs incentivize more expensive list prices for prescription drugs, hurting patients and families. Despite rebates and negotiations behind the scenes, patients often end up paying the artificially inflated list price for a prescription drug. Manufacturers who mark up the prices of their drugs are rewarded while those who offer the lower prices are punished because it is not as financially lucrative for PBMs. This system illustrates why it is time to de-couple PBM fees from “discounts” and shift to a more market-based incentive structure that actually prioritizes outcomes for patients.

While employers and insurance plans think they received a good deal, they could have gotten an even better deal for patients and families. Further complicating things is the fact that PBMs are not legally required to disclose the size of the rebate they get. For example, a PBM may have gotten a five-dollar rebate on a particular drug. However, they could claim they only got a two-dollar rebate and simply pocket the extra three dollars entirely for themselves. Because of the law, they are not required to be transparent about the actual rebate.

Every time a drug is prescribed, PBMs get another rebate. So, PBMs not only want list prices for pharmaceuticals to be higher, but they also want those drugs to be the ones prescribed to patients most often. At this point, one might ask why drug manufacturers even play this game. If they marketed their drugs at competitive prices, patients would be drawn to them anyway and PBMs are not a part of the equation. Similarly, it is reasonable to ask why doctors would not prescribe the most cost-effective drug for their patients.

Unfortunately, PBMs are also in charge of determining which drugs are covered on insurance formularies and which drugs get preferential placement. Given this position over formularies, they make sure lower cost drugs (such as generics and biosimilars) are intentionally given worse placement in formularies – or even excludedaltogether. This is despite the fact that generics only cost a fraction of their brand-name competitors.

Under this system, drug manufacturers must raise the list prices of their products or face irrelevance at the hands of these glorified middlemen, PBMs. One clear solution is to de-link this incentive structure – especially for Medicare plans. This will save patients money at the pharmacy counter and will save taxpayers money in the end as well. Another would be to require that PBMs disclose the size of the rebates they get, adding transparency and accountability to the process. Currently, this is neither required nor allowed.

With Americans spending more on prescription drugs than ever before, this is a commonsense place to begin looking at reform. There is quite literally an incentive structure in place that keeps upward pressure on prices. If Congress is to take drug pricing issues seriously, they need to focus attention on PBMs.

Daniel Savickas is Director of Policy for Taxpayers Protection Alliance. 

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