Consumers in Maryland are facing rapidly rising prices at the pharmacy counter, but drug makers’ prices have roughly kept pace with inflation over the last few years. What gives?
It turns out that pharmacy benefit managers (PBMs), a very small number of largely unregulated companies that administer the drug plans of more than 230 million Americans, are a key part of the problem.
While PBMs are supposed to negotiate with drug manufacturers on behalf of insurance plans to lower pharmaceutical costs, PBMs’ routinely exploit their market power as middlemen in a series of opaque transactions between plan sponsors, beneficiaries, pharmacies, and manufacturers to pad their profits at the expense of their clients.
The PBM industry’s anticompetitive practices perfectly reflect the adage, “knowledge is power.” PBMs thrive on a lack of transparency. In Maryland, clients who hire a PBM to administer a pharmaceutical plan often lack basic information about what drugs are covered, the cost-sharing policies for each drug, and the deals the PBM cuts with manufacturers and pharmacies about pricing and reimbursement. PBMs operate to maximize their profits, rather than to minimize the cost of the plans they manage for their client companies.
Within their heavily concentrated market, PBMs take full advantage of this informational imbalance. For example, one common tactic PBMs use to boost their profits is called “spread pricing.” When a consumer covered under a drug benefit program fills a prescription, the PBM reimburses the pharmacy and bills the plan sponsor for the transaction. But by promising pharmacies access to the plan’s subscribers in return for reduced reimbursements, PBMs are often able to slash their payments to pharmacies. PBMs then bill the plan sponsor more than they agreed to reimburse the pharmacy and pocket the difference. Savings that should be passed through to plan sponsors and beneficiaries never make it past the PBM.
PBMs also negotiate aggressively with manufacturers for deep rebates and discounts. And they get results: The gap between manufacturers’ list prices and the revenues they actually collect has grown substantially in recent years — up from $74 billion in 2012 to $153 in 2017. But, once again, the vast majority of these savings are never passed on to consumers and plan sponsors — as anyone who’s recently filled a prescription knows. Instead, PBMs capture most of the savings for themselves, and plan sponsors are unaware that any of this is going on.
Last year, Maryland took an important step toward curbing PBMs’ abuses by outlawing “gag clauses” that PBMs use to contractually prevent pharmacists from telling customers when their copayment on a drug exceeds its retail cost and that the customer would be better off buying the drug outside of their PBM plan. The practice allows PBMs overcharge Americans by more than $2 billion every year. By simply allowing pharmacists to inform consumers of their options, Maryland is helping people save money at the pharmacy counter. Transparency is essential.
Now it’s time to take the next step in exposing the PBM industry. A bipartisan pair of state senators in Maryland has sponsored SB 819, a bill to inject much-needed transparency into how PBMs operate. The bill requires PBMs to publicly reveal the share of pharmacy payments that are not passed on to plan sponsors and beneficiaries. Holding PBMs accountable starts with letting Marylanders see how much money is diverted away from reducing drug costs.
SB 819 also requires PBMs to publicly disclose their formulary (the list of drugs covered under a plan), prior authorization requirements, and any cost-sharing (deductibles, copays, and other out-of-pocket costs) provisions for each drug they cover. Plan sponsors should know exactly what they’re buying, and consumers should know exactly what they’re getting.
In short, Maryland’s PBM industry needs a heavy dose of transparency. PBMs are some of the biggest culprits behind surging drug prices, and lawmakers must shine a light on how these companies operate. Consumers should accept nothing less.